Disaster Accounts aka Tragedy Accounts or Donation Accounts

Fundraising/Donation Accounts
by Sam Ott and Mary Beth Guard

In this time of national tragedy there is something in the American spirit that seems to bring out the best in people. Unfortunately, it can also bring out the worst. The dark side of the human spirit that committed the unspeakable acts on September 11 is also evident in those who now try to prey on people who are in despair and those who wish to provide assistance.

Financial institutions will have an important role to play as Americans seek to provide aid and establish deposit accounts to hold contributions. Keep in mind, however, that in considering requests to establish such accounts, appropriate precautions must be undertaken in two regards:
-- the financial institution must avoid becoming the unwitting accomplice of a con artist who wants to set up a bogus fundraising account;

-- the financial institution must document legitimate fundraising accounts properly to ensure the funds will go where they are supposed to go, that the appropriate persons are signers on the accounts, that the correct T.I.N.s are used, and there are contingency plans in place for use of the funds in the event the original cause or recipient becomes unavailable or unable to accept the funds.

Those who make donations will assume that the financial institution where the account is housed has done appropriate due diligence before accepting the account. The purpose of this article is to help you fulfill this responsibility.

The vast majority of solicitations are, of course, made by sincere, trustworthy individuals or organizations who will distribute the funds they collect to the proper recipients. Nonetheless, we have already heard instances of criminals attempting to solicit funds and divert them to their own pockets, far away from legitimate causes and charities.

Disaster accounts generally are established with the stated intent for the contributions to be utilized to pay the funeral, medical, educational, or incidental expenses of a victim, survivor, or family member. For example, an account could be established to fund memorial scholarships at a victim's alta mater or to pay hospital bills resulting for injuries resulting from the tragedy.

Someone may walk into your institution today and say, "I want to set up a relief fund to benefit those affected by the terrorist attacks" or "I want to set up an account to solicit donations for the benefit of so-and-so, who is 8 1/2 months pregnant and was widowed by one of the attacks." When you get a request like these, you must confront a number of different issues:

Is the person seeking to open the account a customer of yours or someone who is known to you?
Is the victim, on whose behalf the account is being established, a customer of yours?
What is the relationship between the person seeking to set up the account and the victim or the disaster?
Is the purpose for which the funds will be used well-defined?
Has the person on whose behalf the funds are being solicited consented to the solicitation? (For example, if the funds are being raised to benefit the widow, does she know of the efforts and has she agreed to allow them?
Who will oversee disbursement of the funds?
Is there any kind of written trust agreement or other instrument that governs the use of the contributions?
How are the funds being solicited? What do the solicitations say about how the funds will be used?
What will happen to the funds in the event they cannot be used for their original purpose? [For example, let's say the funds are to be raised to provide scholarships for those orphaned by the disaster, but before the funds can be turned over, it is discovered that $20 billion has been raised from other sources for the same cause, exceeding by many multiples every economist's estimate of what the cost would be. What happens to the money in that event? Or let's say the funds are raised for the benefit of a minor child of one of the victims, and two months later, before the funds are disbursed, the minor child passes away. What then?] A related question is: What happens if the amount of funds deposited in the account exceed the amount of the victim's or beneficiary's expenses (if the purpose of the funds was to pay those expenses)?
Who will be authorized to sign on the account? Should it even be a transaction account?
What tax ID number should be used?
What happens if the authorized signer becomes incapacitated, dies, or becomes unavailable? [This happened to one bank recently on a disaster account. There was only one authorized signer, and he was declared mentally incompetent, leaving no one authorized to withdraw funds.]

In an effort to answer the above questions, a financial institution may want to consider the following:

Is the establishment of a disaster account governed by State law? Some states have adopted a "statutory support trust" law that provides the language for a very simple, but effective, model trust to be used by a financial institution for the purpose of receiving money donated by any person as a public service to assist the beneficiary of the trust or account in the payment of medical, financial, educational, humanitarian or other similar needs. Here is an example of such a law: 6 OS 3010. If your state has such a law in place, this type of trust would probably be the ideal vehicle for managing solicited funds.
What is the relationship of the party establishing the account to the victim or the beneficiary? In many instances legitimate accounts are established by a friend, associate or relative of the family of the victim or beneficiary. Be wary if the person attempting to solicit the funds has no known connection with the victim or beneficiary. In such case, it may be better to recommend the funds be channeled through an established relief organization, although it may not be possible in that case to earmark them for a specific individual.
Check with your local chamber of commerce or local charitable foundations to see if they could serve as the conduit for donations. Their board and officers will then have the responsibility to see that the money is used in the proper way.
Is the account established by a known customer? If the party seeking to establish the account is not a current customer, it would be prudent to inquire why the party is not establishing the account in an institution where a relationship exists.
Are the funds being sent directly to the bank? If the funds are sent directly to the bank or a bank lock-box address, the contributors will have the impression that the institution is involved and supports the effort. The contributor will assume that the institution has conducted a due diligence investigation to determine that the funds are being used for the intended purpose. Determine if you're willing to take on that level of accountability.
Who is the authorized signer on the account? If the account is set up to benefit the widow, for example, one alternative is to obtain the widow's permission to establish the account in her name, with her SSN as the TIN, with her being the authorized signer. That way, you know the funds have reached the proper destination. On the other hand, if the solicitation is to pay funeral expenses of victims (and you don't have a statutory support trust type law), you might discuss with bank counsel the possibility of setting up an escrow account for the funds to be paid to the funeral homes upon receipt of proper documentation of funeral expenses, and have the escrow agreement provide that any remaining funds will be turned over to a charity whose mission is consistent with the perceived intent of the original donors.
What happens if the authorized signer becomes incapacitated? The account should have more than one authorized signer or a contingent signer in the event the authorized signer is not available or becomes incapacitated.
If your state doesn't have something like the statutory support trust law and you believe the donations you are likely to receive will be significant in size, you may want to require a formal trust to be drafted that sets forth all the salient details and obligations relating to the funds. At the very least, the details should be made part of the deposit account contract.
How should the account be >
Whose Social Security number or Tax Identification number should be used on the account? As noted above, the person setting up the account generally will not be the owner of the account, although sometimes affected parties who need funds to help with a tragedy may indeed set up the account themselves. If the affected parties are setting up the account, it could be set up in their names and use their TINs. If it's someone other than the affected parties, however, the person will not be the owner and it will not be proper to use his or her tax ID number. In most cases, if possible, the beneficiary's Social Security number should be used or a Tax Identification number obtained for the account.
What happens if the stated purpose of the account changes or is no longer applicable? For example, if a fund is established to pay for an individual's medical expenses, what happens if the person dies or all expenses are paid and funds remains in the account? In one such instance, a financial institution was forced to escheat the remaining funds to the state. Most likely the contributors intended the funds to be utilized for the stated purposes or if the stated purpose became moot, they assumed the funds would be used for a similar purpose. A financial institution should strongly suggest that the stated purpose also include contingencies so the institution is not faced with this dilemma. A recognized charity with a purpose consistent with the original solicitation for donations would be an appropriate alternative beneficiary.

These are basic questions and issues that should be considered by a financial institution regarding the establishment of a disaster account. There may be other questions that should be asked by a financial institution on a case by case basis while conducting a due diligence investigation.

Some of you reading this article may have developed your own successful strategies for dealing with these types of accounts. We encourage you to share your ideas on the Bankers' Threads message board.

Copyright © 2001 BankersOnline.com. First published on BankersOnline.com on 09/17/01.