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December 15, 2012
Unlimited FDIC protection for trust accounts to expire soon

A special recession-prompted program that offered unlimited FDIC protection for lawyers’ trust accounts and other bank deposits is scheduled to end January 1, when coverage will be limited to $250,000 per client per institution.

Congress could extend the deadline. As this Bar News went to press, legislation had been introduced in the U.S. Senate, but it was unclear if it had any chance of passing in the lame duck Congress.

According to The Florida Bar Foundation, if Congress extends the unlimited FDIC protection, it is expected that IOTA accounts will be included in the extension. Foundation Executive Director Jane Curran commented that, “Whether or not the unlimited deposit insurance program is extended past December 31, 2012, client and third-person trust deposits in IOTA accounts will continue to receive the same FDIC protection as any other trust deposit.”

Florida Bar rules do not require lawyers to divide trust account funds among multiple accounts to ensure FDIC coverage, according to Bar Ethics Counsel Elizabeth Tarbert, but because they are acting as fiduciaries for their clients they should consider whether doing so is advisable.

Guidance on the subject, she said, is provided by Bar Ethics Opinion 72-37.

That opinion says, “Although there is no ethical requirement that a lawyer divide trust funds in order to ensure complete FDIC coverage, he is nevertheless expected to act prudently and consider the deposits’ size in relation to the size and reputation of the financial institutions concerned. . . .

“A lawyer is not an insurer of clients’ funds in his possession, and there is no ethical requirement that he keep such funds in numerous separate accounts so as to assure complete FDIC insurance coverage of all funds. However, in handling clients’ funds, the lawyer is acting as a fiduciary or trustee and is expected to act as a prudent man. Obviously the size of the deposit should be prudent in relation to the size and reputation of the financial institution where it is placed. If there is any reasonable doubt in the mind of the lawyer as to the security of the deposits, it might then become prudent to divide the trust funds and take advantage of FDIC insurance. . . .”

Tarbert said lawyers should remember the $250,000 limit does not apply to the trust account, but to each client with money in the account. Thus if a lawyer has a trust account with $1 million in it, but no individual client with more than $250,000, then all those clients will normally be covered by the $250,000 limit.

According to the FDIC’s website, “FDIC regulations provide that deposit accounts owned by one party but held in a fiduciary capacity by another party are eligible for pass-through deposit insurance coverage if (1) the deposit account records generally indicate the account’s custodial or fiduciary nature and (2) the details of the relationship and the interests of other parties in the account are ascertainable from the deposit account records or from records maintained in good faith and in the regular course of business by the depositor or by some person or entity that maintains such records for the depositor.”

Exceptions would be if the attorney has several different trust funds and a client has more than $250,000 split between the various funds. The client would be insured only to $250,000.

Another exception, Tarbert said, would be if the client had a personal account in the same bank as the trust fund. The FDIC limit applies to the total amount of funds one person has in the institution, whether it is in individual accounts, trust accounts, or both.

For that reason, Tarbert added, attorneys may want to tell clients the names of the banks holding the trust accounts.

The FDIC website has more information about the expiration of the unlimited insurance cap on deposits. Answers to frequently asked questions can be found at:

A notice of the expiration of the unlimited cap, which is part of the federal Dodd-Frank Act regulating the financial industry, can be found at:

The unlimited cap was granted at the height of the financial crisis when the federal government sought to bolster confidence in banks in the wake of the failure of some banks and perceived widespread weakness of others.

[Revised: 11-26-2017]