What happens to the money on deposit at the debt collection lawyer’s bank if that bank fails? Could you stand to lose the money? Recent news could leave you wondering whether monies collected and deposited by your debt collection attorney on your behalf will be safe or at risk.
This time around the federal government agreed to make good on all funds in deposit at Signature Bank and SVB despite the FDIC limit to insure a maximum of $250,00.00 on deposit at each financial institution.
As a Signature Bank customer and debt collection attorney (holding mine in trust for clients) when the news broke, I wondered what would happen to client funds in the event of a bank failure if the federal government would not step in. What would happen to the monies I was holding in trust for clients? I wondered if New York State would step in and restore or replace the funds held in an IOLA (NYS trust account).
So, how are IOLA accounts covered by the FDIC for insurance purposes?
As said before, trust deposits are insured by the FDIC up to the standard amount of $250,000.00 for each of the beneficiaries in the trust, as long as the number of beneficiaries does not exceed five. And is regardless of whether the trust is revocable or irrevocable and is also not dependent upon any contingencies or the specific allocation of funds among the beneficiaries. This provides a maximum amount of deposit insurance coverage of $1,250,000 per owner, per insured depository institution for trust deposits.
How the FDIC Determines the Identity and Amount of Intended Beneficiaries in a Trust Account
First, the fiduciary nature of the trust account must be disclosed in the account title. Additionally, the identities and interests of the principals must be ascertainable by either the deposit account records of the bank or by carefully maintained records, in good faith and in the regular course of business, by the depositor.
In the event of a bank failure, the FDIC would request these records from the bank and the depositor.
An example would be if a debt collection attorney collected $400,000 on your claim. Assuming the attorney is on a 20% contingency fee, $60,000 would be fees for the attorney and $340,000 would be monies held in trust and owed to you. The attorney would not disburse their fees until they remitted the net to you.
You, the creditor are the intended beneficiary of the trust account in the amount of $340,000. In the event of a bank failure, the FDIC would insure $250,000.00 of your funds and request records from the bank and fiduciary to determine you are the intended beneficiary. Your attorney would then be able to produce backup such as the engagement letter, copies of checks, deposits, an account statement, etc. to make sure your deposits are insured.
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