News and Information
March 16, 2023

Concerns Regarding FDIC Insurance of Trust Accounts Addressed

Recent bank failures have prompted lawyers to check on the status of the banks holding their trust accounts. The regulation and soundness of banks and other financial institutions is beyond the purview of the VSB, but lawyers should be informed about the FDIC deposit insurance of their IOLTA accounts. 

The FDIC insures funds deposited by a fiduciary on behalf of an owner as the deposits of the owner, not of the fiduciary, if disclosure requirements for fiduciary accounts are met. For pooled lawyer trust accounts that hold the funds of several owners in one account, the deposits of each owner will be insured as that owner’s deposits up to $250,000. Lawyers in compliance with the trust accounting requirements under Rule 1.15 generally will satisfy the disclosure requirements for FDIC insurance that (i) the fiduciary nature of the account be disclosed in the bank’s deposit account records (e.g., “Smith & Jones Law Firm, Client Trust Account”) and (ii) the name and ownership interest of each owner be ascertainable from deposit account records of the insured bank or from records maintained by the lawyer. This makes it vital that lawyers maintain the appropriate records for their trust accounts to protect clients’ funds in the unlikely event of a bank failure.

Pursuant to Part 6, § IV, Paragraph 20 of the Rules of Court, all trust accounts must be maintained at a financial institution (i) approved by the VSB, which includes “regulated state or federal chartered banks, savings institutions, and credit unions that are properly licensed and authorized to do business, have federal insurance on deposits,” and (ii) that have agreed to abide by the VSB Approved Financial Institution Agreement. 

According to Emily F. Hedrick, VSB Ethics Counsel, there is no ethical requirement for lawyers to inquire into the financial status of a bank or other financial institution that is otherwise appropriately licensed and insured, and a lawyer would not be ethically responsible for any loss of uninsured client funds if the lawyer is in compliance with the requirements, summarized above, to obtain FDIC insurance of fiduciary accounts.

Updated: Mar 16, 2023