- Who must maintain a client trust account?
- What does the rule require of lawyers and law firms who handle client funds?
- How does COLTAF use the interest?
- How does a lawyer or law firm determine which client funds should be deposited in a pooled COLTAF account and which should be invested on behalf of individual clients?
- May a lawyer or law firm establish a pooled interest-bearing trust account and pay the interest to the clients?
- May a lawyer place client trust funds in an interest-bearing account and
keep the interest? - What effect does COLTAF participation have on clients?
- How are COLTAF accounts established?
- Do all financial institutions participate in COLTAF?
- Who decides whether banks are complying with interest rate comparability?
- What if there are no banks in my community that participate in the program?
- When does a lawyer need to establish a COLTAF account?
- What if the financial institution charges fees on COLTAF accounts?
- Do different financial institutions have different fee schedules and interest rates for COLTAF accounts?
- Are lawyers required to notify clients of participation in COLTAF?
- What are the tax consequences of participation in COLTAF?
- What about lawyers who are licensed in Colorado, but who maintain their offices (and their trust accounts) in another jurisdiction?
- How is the program enforced?
Q. Who must maintain a client trust account?
A. Colorado lawyers and law firms receiving, maintaining, or disbursing client funds in Colorado.
Q. What does the rule require of lawyers and law firms who handle client funds?
A. Rule 1.15B of the Colorado Rules of Professional Conduct requires all client funds to be held in an interest-bearing or dividend-paying account, with the interest or dividends payable either to the client or to the Colorado Lawyer Trust Account Foundation (COLTAF). COLTAF accounts are for client funds that are nominal in amount or are expected to be held for a short period of time and, as such, would not be expected to earn interest or pay dividends in excess of the reasonably estimated cost of establishing, maintaining, and accounting for trust accounts for the benefit of such clients. The interest on COLTAF accounts is paid to COLTAF. For client funds that are large enough or are expected to be held for a long enough period of time to warrant the cost of establishing, maintaining, and accounting for the interest, lawyers are expected to set up separate interest-bearing or dividend-paying accounts for the benefit of such clients.
Q. How does COLTAF use the interest?
A. COLTAF, a nonprofit corporation, uses the interest to improve access to civil justice in Colorado by making grants to organizations that meet one or more of its four purposes: 1. To assist in providing legal services to the disadvantaged; 2. To improve the delivery of legal services; 3. To promote knowledge and awareness of law in the community; and 4. To improve the administration of justice.
Q. How does a lawyer or law firm determine which client funds should be deposited in a pooled COLTAF account and which should be invested on behalf of individual clients?
A. The determination of whether a particular client’s funds are so nominal or are expected to be held for such a short period of time that it is not practical to earn or account for income on the individual deposits, and thus should be deposited in the pooled interest-bearing trust account with interest payable to COLTAF, rests in the good faith judgment of the lawyer or law firm. Among the factors to consider are: the amount of interest which the funds would likely earn during the period they are expected to be deposited; the reasonably estimated cost of establishing, maintaining and accounting for a separate trust account for the client (including without limitation administrative costs of the lawyer or law firm, bank service charges, and costs of preparing tax reports of such income to the client); the nature of the transaction(s) involved; and the likelihood of delay in the relevant proceedings.
Q. May a lawyer or law firm establish a pooled interest-bearing trust account and pay the interest to the clients?
A. Yes. A lawyer or law firm may set up a pooled interest-bearing trust account, and then either the financial institution or the lawyer provides for computation of interest earned on each client’s funds, the payment of that interest to each client, and the necessary record keeping and filing of paperwork with the I.R.S.
Q. May a lawyer place client trust funds in an interest-bearing account and keep the interest?
A. No. Such practice is unethical. The lawyer cannot derive any personal benefit from client funds.
Q. What effect does COLTAF participation have on clients?
A. COLTAF has no effect on clients. When no interest is earned on funds in lawyer trust accounts which are nominal or short-term, no one benefits except the financial institution.
Q. How are COLTAF accounts established?
A. The lawyer or law firm submits to the financial institution a COLTAF Enrollment Form, which authorizes the account to be interest-bearing for the benefit of COLTAF. All COLTAF trust accounts must be designated, as well as deposit slips and checks drawn thereon, as a “COLTAF Trust Account”. Normally, financial institutions and their staff will be fully informed about establishing COLTAF accounts. However, if they have any questions about establishing an account, they may contact the COLTAF office at 303-863-7221.
Q. Do all financial institutions participate in COLTAF?
A. A COLTAF account must be maintained only in financial institutions approved by the Office of Attorney Regulation Counsel (“Regulation Counsel”). To qualify as an Approved Institution, a financial institution must agree, among other things, (1) to promptly report any trust account overdraft to Regulation Counsel; (2) to respond to subpoenas issued by Regulation Counsel; and (3) to pay on its COLTAF accounts the highest rate of interest or dividends generally available to its similarly-situated non-COLTAF accounts (so-called “interest rate comparability”). A list of approved financial institutions is maintained at http://www.coltaf.org/coltaf-banks/. Each financial institution approved by Regulation Counsel must cooperate with the COLTAF program and must offer a COLTAF account to any lawyer who wishes to open one. If you would like more information about participating financial institutions or the institution’s policies regarding COLTAF accounts, please call the COLTAF office at 303-863-7221.
Q. Who decides whether banks are complying with interest rate comparability?
A. Lawyers are not required to make independent determinations as to whether their banks satisfy the interest rate comparability requirements. Under the Rule, COLTAF is charged with making determinations and informing Regulation Counsel as to each financial institution’s compliance with the comparability requirements. Lawyers need only confirm that their financial institution is on the list of Approved Institutions. The list of Approved Institutions is available at www.www.coltaf.org.
Q. What if there are no banks in my community that participate in the COLTAF program?
A. Almost all banks in Colorado participate in the COLTAF program. If you practice in a community in which no financial institution participates in the COLTAF program, you will not be required to participate in COLTAF.
Q. When does a lawyer need to establish a COLTAF account?
A. A COLTAF account should be established when the lawyer receives client funds that should be deposited in such an account.
Q. What if the financial institution charges fees on COLTAF accounts?
A. Most banks in Colorado waive the regular service charges that might be associated with COLTAF accounts. If they do not, banks are allowed to deduct allowable reasonable COLTAF fees from interest or dividends earned on a COLTAF account. Allowable reasonable COLTAF fees are defined as per-check charges, per-deposit charges, fees in lieu of minimum balances, federal deposit insurance fees, sweep fees, and reasonable COLTAF administrative fees. All other fees (including the fees associated with ordering checks, wire transfers, and overdrafts) are the responsibility of the lawyer or law firm.
Q. Do different financial institutions have different fee schedules and interest rates for COLTAF accounts?
A. Yes. To support COLTAF and Colorado’s civil legal aid delivery system, laweyrs are encouraged to hold their accounts at those financial institutions that pay the most favorable COLTAF rates and waive all regular service charges. The charges by financial institutions to COLTAF range from no charge to over $10 per month. Interest rates also vary from one financial institution to another. COLTAF Prime Partners are those financial institutions that go above and beyond the rate comparability requirements in the Rule and pay a net rate equal to the higher of 75% of the Federal Funds Target Rate or 0.50%. COLTAF Prime Partners also waive all regular service charges.
Q. Are lawyers required to notify clients of participation in COLTAF?
A. Lawyers have no duty to notify clients of participation in COLTAF. Although keeping the client informed about the program is laudatory, in situations where a COLTAF account is appropriate, the client’s funds, as a practical matter, will not earn interest for the benefit of the individual client.
Q. What are the tax consequences of participation in COLTAF?
A. There are none to the lawyer or the client. According to the Internal Revenue Service, interest income that is earned on pooled accounts containing clients’ nominal and short-term funds held by lawyers and paid over to COLTAF pursuant to an order of the Colorado Supreme Court is not included in the gross incomes of either the clients or lawyers. (Rev. Rul. 81-209 amplified). The interest belongs to and is paid directly to COLTAF, a nonprofit corporation, so there are no tax consequences. COLTAF’s tax identification number is used on the account, and the interest is paid directly by the financial institution to COLTAF.
Q. What about lawyers who are licensed in Colorado, but who maintain their offices (and their trust accounts) in another jurisdiction?
A. Every lawyer practicing in Colorado is required to maintain a trust account in a financial institution doing business in Colorado if he or she is accepting client funds in Colorado. If a lawyer or law firm participates in Interest on Lawyer Trust Account (“IOLTA”) programs in more than one jurisdiction, including Colorado, IOLTA funds that the lawyer or law firm holds in connection with the practice of law in Colorado should be held in the lawyer or law firm’s COLTAF account. The lawyer or law firm should exercise good faith judgment in determining which IOLTA funds it holds in connection with the practice of law in Colorado.
Q. How is the program enforced?
A. Colorado lawyers are required to certify that they have complied with Rule 1.15, or to provide a justifiable reason for non-compliance, on their annual Attorney Registration Statement. The Supreme Court has asked that COLTAF assist it in determining whether lawyers or law firms have complied with the mandatory program. If a lawyer or law firm has not complied with the mandatory program where it is feasible to do so, that lawyer may be subject to disciplinary proceedings.