When I served as General Counsel for the Oklahoma Bankers Association, this question was frequently asked by bankers. In August, 1994, I wrote an article for the OBA publication that we are reprinting here, as I think it still offers helpful guidance.
A family's house burns down, leaving family members with only the clothes on their backs and no money to replace the items they lost. A community member desperately needs a transplant operation. After a drive-by shooting claims the life of a teenager, family and friends mount a fund-raising effort to cover the funeral expenses. A popular news reporter dies in a plane crash and members of the public send money for the reporter's child's education.
All of the terrible scenarios described above have one common denominator: they will all generate donations from family, friends, or generous strangers who have heard or read about the disaster. In many instances, those contributions will bring about the need for a special bank account. How you style the account, what documentation you require, and how you keep the bank from being caught in the middle of a fight over entitlement to the funds, are critical issues that must be grappled with before the account is activated.
To determine the appropriate way to handle the account, it is necessary to obtain answers to the following questions:
- Who will be the true owner of these funds?
- What Taxpayer Identification Number should be used on the account?
- Who will be authorized to transact business on the account?
- What evidence do we have that the person(s) who seek(s) to open the account has authority to do
- Does the intended "beneficiary" of the funds know that this fund is being started or maintained?
- What safeguards do we have against fraud?
- Is this money being solicited for a specific, limited purpose?
- Will we be in a position of being required to monitor transactions on the account?
- What measures can be taken to ensure the funds are used properly?
- What if the authorized signer is no longer able or willing to transact business on the account? How is a successor authorized signer to be chosen?
- What happens if the purpose for which the funds were collected ceases to exist? (For example, what if the person who needs the transplant operation goes into remission and no longer needs the transplant?)
- Can the bank be held liable if the funds are misused?
- Do the checks received have to be made payable to whatever name the fund has been given? If they aren't, to what extent will the bank allow them to be deposited into the account anyway? What special features of this particular account might cause problems? (For example, if the fund is to benefit four children orphaned by a double murder of their parents, are the funds to be divided equally among the children or distributed according to need?)
There are several alternatives available to a bank when faced with the prospect of opening such an account. Those alternatives include:
Requiring the establishment of a formal trust. The trust would have legal ownership of the funds; the beneficiary would have the beneficial interest. A trustee or cotrustees named in the trust instrument would be given certain specifically enumerated duties and responsibilities. The purposes for which the funds could be used would be delineated, and a procedure for appointment of successor trustees would be clearly set forth, as would an alternative use for the funds should the original intended use cease to exist. If an account is set up in this manner, you would follow IRS guidelines on trusts to determine if the trust itself had to have a separate tax I.D. number. Typically, it would. And a trust tax return would need to be filed.
The trustee could either be an individual, or the bank's own trust department could serve as trustee if the account size warranted the use of a professional trustee. Another alternative would be for the bank's trust department to serve as cotrustee with the individual setting up the account. Particularly if the trustee is an individual, be sure the intended recipient of the funds is aware of the existence and nature of the trust and the provisions of the trust instrument in order to minimize the risk of fraud.
When thinking about the precautions you must take, it may be helpful to think through the types of scams that could be perpetrated with this type of fund. For example, Dewey Cheatem could come to your bank and set up an account to raise funds to save the dying in Rwanda. Using flyers, newspaper ads, and door-to-door canvassing, he could solicit funds for this cause, deposit them into this account, and then utilize the contributions for his own personal benefit. You must ask yourself at the outset what the connection is between the person seeking to establish the account and the intended beneficiary of the funds. What evidence do you have of a relationship sufficient to warrant allowing the person to deal with these contributions?
According to a few of our banks, in some towns these accounts are operated under the auspices of the town's Chamber of Commerce. The Chamber solicits the funds and establishes a special account (such as one styled, "Mt. Vernon Chamber of Commerce, Cynthia Jones Transplant Fund.") The Chamber's tax identification number is used, and the Chamber assumes all responsibility for proper expenditure of the monies collected.
Unfortunately, this option is not universally available. Some Chambers of Commerce are unable or unwilling to assume such a task.
If the intended beneficiary of the funds is a minor child, an account established under the Uniform Transfers to Minors Act ("UTMA") may be an option.
The use of an escrow account is a remote possibility. The problem is that an escrow account requires an underlying agreement between two or more parties that the funds will be held until a stated time, or the occurrence of a particular event, or something of that sort. Who would the parties to an escrow agreement relating to a tragedy account be? Presumably, the bank would act as escrow agent, but the remainder of the arrangements would have to be devised by legal counsel -- if it's possible at all. The account could be set up pursuant to a specifically drafted deposit account agreement in which all the details regarding
- solicitation of funds;
- authority to transact business;
- intended use of the funds;
- proper T.I.N.;
- procedure for new signers to be added or substituted;
- responsibility for filing any necessary tax return;
- alternative use of funds
and miscellaneous other matters are included. An individual, or group of individuals acting jointly, could then operate the account in conformity with the terms of the deposit account agreement. If the bank could secure from those individuals some kind of performance bond or indemnity agreement to protect the bank and the intended recipient of the funds, so much the better.
And lest you think my overactive imagination is simply conjuring up unreal nightmares, consider the following very real and very public instances of tragedy account problems:
- An account was established to pay expenses incurred due to the birth of Siamese twins. The father of the twins diverted a substantial portion of the funds to his own use -- for the purchase of cocaine! In the aftermath of the public outcry that followed his outrageous conduct, contributors were asking questions like, "How could this happen? Why did the bank allow this? Why weren't there safeguards to make sure the money was used for its intended purpose?"
- After the kidnapping of a newborn baby from a local hospital, contributions were solicited for a fund designed to help find the infant, secure its safe return home, and catch the kidnapper. When a Missouri man came forward with evidence that led to the kidnapper and the baby, it was believed by many (including the man and a majority of the contributors) that a reward would be paid to him from the fund. Not so, said the baby's relatives. They claimed the donated funds were for the baby. The bank was unhappily stuck in the middle and received some negative publicity as a result.
The bottom line is that it is important not to enter into these deposit relationships lightly. Because of the potential for fraud or misuse, careful thought should be given to the proper method for styling the account and putting proper precautionary measures in place.
First published on BankersOnline.com 3/5/01