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Lawyers have fiduciary obligations to safeguard and account for the funds and property of clients and others in their possession. A trust account must be maintained to hold the funds of clients and third parties that come into a lawyer’s possession in connection with a representation.
Examples of funds which must be placed in trust accounts include:
- Personal Injury Settlements
- Divorce Settlements
- Real Estate Escrows and Closing Proceeds
- Advanced Fees for legal services
- Cost Advances
SCR 20:1.15 (d)(6) states “A lawyer or law firm shall direct the IOLTA participating institution at which the lawyer or law firm’s IOLTA account is located to do all of the following, on at least a quarterly basis:
- Remit to WisTAF the interest or dividends, less allowable reasonable fees as allowed under par. (5), if any, on the average monthly balance in the account or as otherwise computed in accordance with the IOLTA participating institution’s standard accounting practice.
- Provide to WisTAF a remittance report showing for each IOLTA account the name of the lawyer or law firm for whose IOLTA account the remittance is sent, the rate and type of interest or dividend applied, the amount of allowable reasonable fees deducted, if any, the average account balance for the period for which the report is made, and the amount of remittance attributable to each IOLTA account.
- Provide to the depositing lawyer or law firm a remittance report in accordance with the participating institution’s normal procedures for reporting account activity to depositors.
- Respond to reasonable requests from WisTAF for information needed for purposes of confirming the accuracy of an IOLTA participating institution’s certification.
At the time an attorney client establishes an IOLTA trust account with your institution, they will need to complete two forms in cooperation with your financial institution: the Attorney IOLTA Trust Account Agreement (send a copy to WisTAF upon completion) and the Overdraft Notification Agreement (send a copy to the Office of Lawyer Regulation upon completion).
E-banking Information
The Supreme Court of Wisconsin has issued an order amending SCR 20:1.15 and making minor amendments to SCR 20:1.0 and the comment to SCR 20:1.5(g). The order becomes effective July 1, 2023.
Lawyers do not need to do anything at this time. The amendments do not require lawyers to take any affirmative steps or change how they handle client and third-party funds. Whether a lawyer currently has just one trust account, or they currently have a trust account and also an “E-Banking Trust Account,” they can continue to use such accounts.
If, however, a lawyer wants to begin accepting electronic payments to their trust account, or make electronic payments from the trust account, the amended trust account rule provides options to do so.
The amendments repeal SCR 20:1.15(f)(2)c. and SCR 20:1.15(f)(3), which prohibited electronic payments to and from trust accounts. In effect, lawyers will be allowed to engage in electronic transactions in their trust account without the having a second “E-Banking Trust Account” under current SCR 20:1.15(f)(3)b. or complying with the “Alternative to E-Banking Trust Account” under current SCR 20:1.15(f)(3)c.
Pursuant to amended SCR 20:1.15(f)(1), lawyers will be able to engage in electronic transactions so long as they are “directed by one or more lawyers authorized by the law firm or a person under the supervision of a lawyer having responsibility under SCR 20:5.3.” Written confirmation of authorization for electronic disbursements should be maintained by the attorney/law firm as part of complete trust account records.
Amended SCR 20:1.15(f)(1) further requires that in the event of any shortfall or negative balance caused by a chargeback, surcharge, or ACH reversal by a financial institution or card issuer, a lawyer must reimburse the trust account within three business days of receiving notice of such shortfall and must do so before disbursing any funds.
To protect trust funds, lawyers should arrange for any surcharges, fees, reversals, or chargebacks to be withdrawn from the operating account rather than from a trust account. Further, to the extent a lawyer intends to make a client responsible for any electronic payment processing fees, the lawyer should confirm this is permissible with their card payments processing provider and notify the client in writing beforehand, preferably in the fee agreement.
If a lawyer does not wish to accept electronic payments directly to their trust account, amended SCR 20:1.15(b)(6)b. creates a new option for lawyers to accept electronic payments for advanced fees or advanced costs directly to a non-trust account temporarily. Following receipt, lawyers will be required to transfer the funds into a trust account within two business days. This option will also allow lawyers to accept a single electronic payment for both earned fees and advanced fees and costs to their operating account, provided they promptly transfer the unearned portion to the trust account.
Please note that the general duty under SCR 20:1.15(b)(1) to hold in trust all unearned fees and cost advances will apply to funds received pursuant to amended SCR 20:1.15(b)(6).
Lawyers who choose to accept electronic payments should consider any possible tax consequences. For example, 26 U.S. Code § 6050W requires credit card processors to report gross credit card transactions to the IRS on a 1099-K. This regulation does not distinguish between payments made to an operating account and payments made to an IOLTA account. Payments for advanced fees and costs are reported together with payments for services already rendered. Therefore, amounts reported on the 1099-K will not necessarily reflect gross income actually received. Further, 26 U.S. Code § 6050W imposes a 28% withholding penalty on all credit card transactions if the name of the lawyer or law firm used by the card processor does not exactly match the name associated with the federal employment identification number. Lawyers should consult with a tax professional prior to accepting electronic payments. Further questions should be directed to Travis Stieren, Office of Lawyer Regulation at travis.stieren@wicourts.gov
If your institution does not currently hold IOLTA accounts and you would like to join Wisconsin's IOLTA program, please contact IOLTA Program Manager, Tehmina Islam at (608) 257-6845 or tislam@wistaf.org before opening IOLTA accounts.
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