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Unlimited FDIC protection for trust accounts expires

Senior Editor Regular News

Unlimited FDIC protection for trust accounts expires

Senior Editor

There was no last minute congressional action and unlimited FDIC insurance on lawyers’ trust accounts — and other bank deposits — has expired. As of January 1, insurance coverage is $250,000 per individual per institution.

According to the ABA, which was lobbying for an extension on unlimited insurance coverage, “For the past two years, IOTA and non-interest-bearing accounts enjoyed unlimited FDIC insurance coverage pursuant to Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. That provision was to be effective for two years with a sunset date of December 31, 2012.

“Although there have been attempts in Congress to extend that coverage for an additional two years, and the American Bar Association and others have lobbied for that extension, those efforts have not been successful due largely to legislative maneuvering that was unrelated to the merits of the issue.”

Jane Curran, executive director of The Florida Bar Foundation, noted it doesn’t matter if the account involved is an IOTA or non-IOTA, interest or non-interest bearing account. All are subject to the $250,000 per individual limit.

She also noted that typically the FDIC arranges for another bank to “acquire” the failed bank, and in those cases all deposits, regardless of size, are protected. Only in cases where no acquisition is arranged does the $250,000 limit apply, but Curran said she is unaware of any cases around the country where an IOTA trust account lost money when a bank failed and no acquisition was arranged.

Bar Ethics Counsel Elizabeth Tarbert said there are two points lawyers need to keep in mind when considering FDIC coverage for their trust accounts. One is that Bar rules do not require that a lawyer deposit client trust funds in multiple financial institutions to ensure FDIC coverage for all trust account funds, but, because they are fiduciaries for their clients, lawyers should consider whether having that coverage is advisable.

Guidance on the subject, Tarbert 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 [or she] 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 [or she] 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 [or woman]. 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.. . . ”

The second consideration is that the $250,000 applies to the owners of the funds, not to the lawyer who sets up the trust account. That means, Tarbert said, if a lawyer has a $1 million trust account, but no individual client has more than $250,000 in that account, then all the clients will normally be covered.

An exception, she said, would be if the client had other deposits in the bank besides those in the lawyer’s trust account. The $250,000 applies to the client and considers all funds owned by that client. If the client had $400,000 split between personal accounts and a lawyer’s trust accounts, only $250,000 would be covered, Tarbert said.

She said lawyers might consider telling clients which banks they have trust accounts in because of that limit.

According to a list compiled by the American University School of Communication’s Investigative Reporting Workshop, as of mid-November, 50 banks failed in the U.S. in 2012, six of them in Florida, and 92 failed in 2011, 13 of them in Florida. In six cases over both years, no acquiring bank was found and the FDIC paid off insured deposits.

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