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Over the past few days, three banks have been placed into receivership by government regulators and there may be more in the near future. This means that their customers might have trouble withdrawing their deposits. And if they have large balances that exceed the FDIC’s insurance limit of $250,000, they are at risk of losing the uninsured amount unless the government or another party can step in to cover the balance.
This can cause problems for attorneys who have client trust accounts or Interest on Lawyer’s Trust Accounts (IOLTA). Most state bars have strict rules on maintaining trust accounts. Mismanaging them can result in discipline, disbarment, and even civil and criminal charges if a lawyer is suspected of using these funds for personal expenses.
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Even though lawyers have no control over when a bank will be in danger, they still have an ethical duty to safeguard their clients’ money. The news should put lawyers on notice that they should make sure that all of their trust accounts are protected. By doing nothing, they could get into trouble with the state bar.
There are a few things lawyers can do to protect trust account money. However, it is best to contact your state bar for additional guidance.
First, make sure that all trust accounts have balances under $250,000. If the balances exceed this amount, check to see if they can be lowered by withdrawing earned fees or paying clients or third parties.
Second, if the balance cannot be lowered to under $250,000, there are several options. One is to start an account at a different bank. This would be a good choice if there are multiple clients whose account balances are under $250,000. According to the FDIC’s website, all single accounts owned by the same person at the same bank are added together and insured up to $250,000. However, be mindful of a bank’s rules for setting up new accounts. You may have to have a minimum balance to avoid monthly service fees.
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For larger cases and clients, a trust account should be set up at a large national bank. These banks are generally believed to be more stable. Some banks are so integral to the national and global economy that governments are likely to intervene in order to avert an economic catastrophe. These banks are known as systematically important financial institutions.
If you are going to move accounts, be sure to let the client know exactly what you are doing and why you are doing it.
Lastly, while it might be a good idea to contact your local bank about its solvency, whatever they say should be taken with a grain of salt. Most banks are not making any public statements as they may inadvertently create a panic.
Chances are that the bank scare will blow over in the near future. But let this be a warning to make sure that your trust accounts are safe. Your reputation and livelihood depends on it.
Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.