Dec. 23, 2010 – Trust accounts established by lawyers to hold client funds will retain unlimited Federal Deposit Insurance Corp. (FDIC) protection after Dec. 31, 2010, following enactment of last-minute legislation (H.R. 6398) by the lame-duck Congress.

Interest on Lawyer Trust Accounts (IOLTA) accounts have enjoyed unlimited deposit insurance coverage since November 2008 when, during the financial crisis, the FDIC announced the coverage as part of a program to boost liquidity in credit markets. That coverage was set to expire on Dec. 31, 2010.

When President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act in July, the law created an equivalent program running for two years beginning Jan. 1, 2011.

However, while the legislation extended unlimited FDIC insurance for non-interest bearing accounts, it included a narrower definition of a ”covered account” and, in what appears to have been a drafting error, the language did not extend unlimited FDIC coverage to IOLTA accounts.

The new legislation approved this week corrects that omission so that IOLTAs will remain fully insured when the president signs it into law.

Wisconsin and all other states have created IOLTA programs that pool interest earned on those accounts to fund civil legal services for the poor. The American Bar Association (ABA) and others supported the FDIC change two years ago and the remedial legislation enacted this week in part because not having the deposit insurance would have created an incentive to keep client funds in (fully insured) noninterest-bearing accounts that would not benefit legal aid programs.

ABA President Stephen Zack welcomed the legislation, noting that it “helps practicing lawyers and their clients, while safeguarding funding for legal aid and the justice system. During this holiday season, it is something to celebrate.”