Request By:
Mr. Gregory C. Fuchs
Administrator
Kentucky IOLTA Fund
Kentucky Bar Association
W. Main at Kentucky River
Frankfort, Kentucky 40601
Opinion
Opinion By: David L. Armstrong, Attorney General; Kevin M. Noland, General Counsel
You have requested an opinion of our office as to whether the Interest On Lawyer Trust Account (IOLTA) Fund would hold the beneficial interest in the NOW Accounts that may be established by lawyers participating in the program. You of other programs in other states that prior to granting regulatory approval, the federal authorities require an opinion rendered by the Attorney General of the state that the organization involved (in this case, the Kentucky IOLTA Fund of the Kentucky Bar Foundation) holds the beneficial interest in the accounts of those participating because it has the exclusive right to the interest on the trust funds maintained under the program.
The Kentucky IOLTA Fund was established by SCR 3.830, effective July 1, 1986. The IOLTA Fund has been established to award grants of funds for any one or more of the following charitable activities undertaken for exclusively public purposes:
(1) To provide legal aid for the poor;
(2) To provide student loans;
(3) To improve the administration of justice; and
(4) For such other programs for the benefit of the public for exclusively public purposes. SCR 3.830(1)(C)
Traditionally, Kentucky lawyers have utilized two types of accounts for deposit of client funds held in a fiduciary capacity. If the funds were large enough or held for a long enough period of time to accumulate a significant amount of interest exceeding administrative costs, separate interest bearing accounts were established. Nominal amounts or large amounts held for very short periods of time were held in non-interest bearing accounts. The IOLTA Rule authorizes lawyers to place certain qualified funds (those nominal in amount, or those to be held for a short period of time) into interest bearing accounts, with the interest generated transmitted by the banking institution to the Kentucky IOLTA Fund. The Fund will then distribute this income as grants for the purposes stated above. The Fund is administered by a nine member board of trustees, including the Chief Justice of the Supreme Court of Kentucky, the President of the Kentucky Bar Association, and seven attorneys, one of whom shall be from each Supreme Court District of the Commonwealth and all seven of whom shall be appointed by the Board of Governors of the KBA and approved by the Supreme Court. See SCR 3.830(1).
No funds may be deposited in any interest-bearing trust account authorized by the IOLTA Rule when either the amount or the period of time that the funds are held would on their own earn for the client any interest above the costs that would otherwise be incurred to generate such interest. The funds generated by the interest-bearing trust account shall remain in segregated accounts of the KBA. The Kentucky IOLTA Fund shall hold the beneficial interest in the funds which are deposited. See SCR 3.830(1)(B) and (2)(B).
Turning to your specific inquiry, it is expected that the Federal Reserve System will require an opinion of the Attorney General as to whether the IOLTA Fund would hold the beneficial interest in the accounts involved (12 U.S.C. § 1832[a]). In response, it is noted that the owner of a beneficial interest is the one who derives gain from the fund. (Scott on Trusts, § 3.2 3rd., 1967). The interest from a NOW account is the beneficial interest. Because under SCR 3.830 the IOLTA Fund will receive all interest generated by IOLTA NOW Accounts, it is the owner of the beneficial interest in the fund. We can identify no state law which would direct otherwise.
Accordingly, we conclude that the beneficial interest in the IOLTA NOW accounts is owned by the Kentucky IOLTA Fund.