I. INTRODUCTION
Both as Nebraskans and as bankers, we are familiar with occasions when a crisis or “tragedy” may visit upon individuals or families in our communities and a special collection is taken up by well-meaning friends and neighbors. Often, your bank is asked to open an account for the deposit of donated funds or at times even asked to serve as the donation collection point. These activities are rarely organized in a uniform manner. Rather, the uniqueness of each situation requires the bank to be aware of the several potential documentation and liability issues as well as precautionary measures prior to setting up such accounts or acting as a collection agent. In other words, entering into a deposit relationship of this type should not be a matter taken lightly.
II. ISSUES TO CONSIDER
When your bank is asked to open an account to receive donations for the aid of individuals or families experiencing special needs (in this article, the simple term “tragedy” account will be used), a number of issues may need to be resolved by the bank, including:
NOTE: Consider several of the items listed above as they may relate to individual or business account owners. Since the bank must obtain a TIN prior to opening an individual or business account (as opposed to an alternative legally recognized entity e.g., formal trust), the person or business should be advised to consult with a tax professional regarding possible negative tax consequences due to income from interest earned (and potentially contributions deposited) by the account holder. Also, the account may be subject to claims of the account holder’s creditors, reachable by garnishment or levy. Finally, the parties should understand that if a person is named as account holder and that person should die, the funds would become a part of the account holder’s estate and the funds may never be distributed to the intended beneficiary(ies).
III. OPENING A “TRAGEDY” ACCOUNT
There are a number of ways a “tragedy” account might be opened and maintained. Therefore, it would be advisable that the bank establish a policy regarding the opening of such accounts only under specific conditions and following specific procedures as outlined by the bank. Adopting a procedure in advance of a request to open a “tragedy” account would allow the bank the luxury of considering many issues in an unhurried and unemotional setting, as well as providing competent and thoughtful guidance in a professional manner when the occasion presents itself. The following materials address the most common questions regarding these accounts.
Should a bank act as the collection agent or collection point for “tragedy” accounts?
Preferably, the bank should make it a policy to refuse the position of a collection agent or collection point. This is because the bank could place itself in the potentially conflicting position of collecting funds for deposit as well as maintaining the funds in a deposit account. If disputes should arise (e.g., as to how the funds are to be used, whether funds are missing, how the funds are being invested, whether fraud was involved, when the “beneficiary” makes demands for the funds, when the “beneficiary” refuses some or all of the funds), the bank could find itself in the unenviable position of being accused of wrong-doing, or in the midst of a battle over entitlements to the money. The bank may also find itself cross-wise with customers over collection problems. In any event, should your bank choose to act as a collection agent or collection point, at the very least, the bank should be encouraged to arrange for a properly executed indemnification agreement for protection.
What precautions should the bank take when dealing with promoters?
In most situations, the bank is aware of the cause and the individual or group promoting donations to an intended “beneficiary.” It is the bank’s best interest to exercise due diligence (for public relations purposes, to avoid situations involving fraud or controversy over use of funds and to limit liability) in satisfying itself that: the promoters have a legitimate relationship with the “beneficiary;” the promoters are acting in good faith and not for their own benefit; and the “beneficiary” consents or at least has knowledge of the promoters’ intentions.
What alternatives might the bank consider?
Special Account and Deposit Agreement. The bank may consider setting up a pre-arranged special account with a specifically drafted deposit agreement that addresses the various issues raised above in this article. For example, the deposit agreement could flesh out details regarding fund solicitations (such as the general or specific purpose of the fund, other uses of the funds, duration of the solicitation period, what to do with a remaining balance), authorized signer(s) for transacting business, additional or successor authorized signer(s), the appropriate TIN for IRS reporting purposes, the responsibility for filing tax returns, obtaining a performance bond or an indemnity agreement (protecting the bank and intended “beneficiary”), and the responsibilities for the payment of service charges or overdrafts. The possible “down-side” of drafting a special account and deposit agreement is that an IRS reporting issue may remain unresolved. The solution to this issue may lie with treating the activity as an “unincorporated association.”
Unincorporated Association. When individuals or the community in general receive donations and desire to open a “tragedy” account, the bank may wish to treat the activity as an unincorporated association. People gathering, organizing or promoting donations could be required to adopt a name and obtain an Employer Identification Number (EIN) from the IRS. Interest income would then be attributed to the unincorporated association rather than to an individual promoter who may be the named authorized signer. Donations by check could name the unincorporated association as payee. In addition, the unincorporated association could be required by the bank to document its authorized signer(s) for transacting business by resolution. In dealing with this entity, the bank has the opportunity to draft a deposit agreement addressing a number of other issues previously raised, such as choosing additional or successor authorized signer(s), the general or specific purpose of the fund, responsibility for filing tax returns, other uses of the funds, duration of the solicitation period, what to do with a remaining balance, and the requirement of a performance bond or indemnity agreement (protecting the bank and intended “beneficiary,” including the payment of service charges or collecting overdrafts).
Trust Agreement. The bank may require the making of a formal trust arrangement by which the trust becomes legal owner of the funds and allows a person or group of individuals to manage the trust assets. The beneficiary would be the intended recipient of the donated funds while the trustee(s) would be granted the duties and responsibilities outlined in the trust agreement. The trust could define who may deposit funds, who can distribute funds and the purpose(s) for which the funds would be used. A properly drafted trust document would also contain provisions for the appointment of successor trustees and how the trust is to be terminated, as well as an alternative use for the funds if the intended purposes of the donations cease to exist. Since a formal trust is a legally recognized entity, it would have a separate TIN and would file its own tax return with the IRS. The bank’s trust department could also take the role of trustee.
Use of Other Organizations. The bank could also require that any “tragedy” account be opened only if operated under the auspices of a recognized civic organization or the local Chamber of Commerce. The organization would take responsibility in soliciting funds, setting up a special account using its own TIN and properly disbursing the funds to the intended “beneficiary.”
Use of Personal Money Orders. As an alternative to opening a “tragedy” account the bank may consider issuing personal money orders as donations are brought into the bank by third parties. Since no deposit account would be opened, the bank will not have to contend with deposit account documentation, TIN certification, and the potential disputes or conflicts that would otherwise arise. Using personal money orders are like “one shot” checking accounts in which the bank finds itself quickly “in and out” of the picture.
Using the Uniform Transfers to Minors Act (“UTMA”). Should the intended “beneficiary” be a minor, the bank may opt to establish an account pursuant the UTMA. This uniform law which has been adopted in Nebraska, provides a number of duties and responsibilities upon the “custodian” who sets up the account. E.g. UTMA resolves many of the issues involving “tragedy” accounts in that it:
Escrow Agreement. The bank could request that it serve as an escrow agent for donated funds deposited in an escrow account pursuant to a written escrow agreement. The promoters would presumably open the escrow account for the “beneficiary” until a certain event occurs, e.g., a specific date or when a specific bill is submitted. The bank should approach the escrow agreement alternative with caution. The arrangements made by escrow agreement should be reviewed by legal counsel.
IV. CONCLUSION
Many of us recall national news stories regarding controversies over “tragedy” accounts. The questions generally revolve around “Why didn’t the bank properly provide safeguards for use of the funds?” or “Why didn’t the bank detect this scam?” Although most Nebraska bankers personally know or are acquainted with most individuals in their communities, special care and proper precautions taken in handling “tragedy” accounts would well serve the bank, the intended “beneficiary,” donators and promoters alike, by avoiding potentially major controversies.