March 2008 Legal Briefs

Understanding Representative Payee Accounts

  1. When is a Representative Payee Appointed?
  2. Correct Account Styling
  3. Guardian/Rep Payee
  4. Successor Trustee/Rep Payee
  5. POA/Rep Payee
  6. Only a Rep Payee
  7. Only an Authorized Signer
  8. Joint Accounts
  9. Organizational Rep Payees
  10. Rep Payees for Children

Understanding Representative Payee Accounts

The Social Security Administration (SSA) makes Social Security payments to retirees and provides Supplemental Security Income (SSI) to disabled individuals and surviving minor children of a deceased parent.  If the recipient is incapacitated or a minor, SSA requires someone to be appointed as representative payee, who then manages the funds according to SSA guidelines, and establishes an account conforming to SSA requirements.

There are seven million representative payees in the U.S.  There are a several ways that representative payee funds can be held for incapacitated adults, including (1) a guardianship account, (2) a trust, (3) an account by power of attorney, or (4) an account by representative payee.  For minor children, the account can simply be a personal account of the parent—unless it’s savings, in which case a minor’s account must follow the same styling requirements as for an incapacitated adult beneficiary.

There are no recent changes in this area, and banks generally feel comfortable dealing with rep payee accounts.  Although it’s not a very complicated area, it’s also true that some issues are not as simple as banks may assume.  There are some pitfalls that create potential liability and should be avoided.  Banks generally make their way through this area without much problem—while perhaps not recognizing some ways that what they are doing is out of line with Social Security requirements.

I hesitate to take what people think is “simple” and turn it into something more complicated, but most banks would benefit by gaining a better understanding of the rules for representative payees, and also by tightening up their standards for dealing with accounts that require representative payee authority from SSA.  

1.  When is a Representative Payee Appointed?

There are three scenarios where a representative payee must be appointed for a recipient of benefits: (a) the beneficiary is a minor, under the age of 18; (b) the beneficiary is a “legally incompetent adult” (as determined by a court, with guardian appointed); or (c) the beneficiary has been “determined by SSA to be incapable of handling their money.” 

The third situation listed above—a determination by SSA—is not the same as a determination of legal incapacity, because there’s no formal hearing to consider the individual’s competency for state-law purposes, and no judge.  (Social Security benefits, and who can spend them, are governed by federal law.  Most other property rights issues—relating to real estate, cars, bank accounts containing non-Social-Security funds, and contracts generally—are determined based on state law.)

SSA has a fairly limited area of interest:  It wants the beneficiary’s Social Security (or SSI) funds to be spent in ways that provide for the beneficiary’s basic living expenses.  If a beneficiary cannot or will not spend funds properly to provide for himself, SSA will appoint a representative payee to do so.

Following are several ways that a person’s circumstances might lead to a finding that he is “incapable of handling his money”:  (1) the person is slipping mentally, (2) he has an addiction (drugs or alcohol) and habitually spends funds in ways not meeting his basic needs, or (3) he is too sick or too physically weak to handle his finances.  Some of these situations might lead a judge to determine that the person is “legally incompetent,” but others would not.

When a Social Security or SSI beneficiary fits within the three categories (minor; incompetent; or incapable of handing his money), appointment of a representative payee is not optional.  There might be legal authority from some other source that appears to entitle someone else to get at funds and spend them (guardian, trustee, POA, authorized signer, joint tenant) but that is not enough if Social Security or SSI benefits are involved:  The individual who wants to manage Social Security or SSI funds must also become qualified as a Social Security representative payee.

SSA’s rules are very protective of incapacitated Social Security beneficiaries.  SSA wants to interview someone before giving him approval as a personal representative who can manage the beneficiary’s money.  A representative payee also must provide annual reports to SSA concerning how the beneficiary’s funds are spent.  If someone took over control of a beneficiary’s funds (such as by exercise of a power of attorney) without getting approval from SSA, these safeguards would be overridden.

The potential liability for banks, if Social Security funds for an incapacitated beneficiary are direct-deposited to an account not established in accordance with SSA’s guidelines, is that SSA can do a “reclamation” of funds direct-deposited after the time when the bank becomes aware that the Social Security beneficiary is legally incapacitated. 

(Reclamation is the same procedure used for Social Security checks direct-deposited after a Social Security beneficiary dies.  But a reclamation certainly occurs much more often on deceased persons’ accounts than on improperly styled accounts receiving deposits of funds for incapacitated persons.  One difference is that Social Security funds are never owed to a deceased person, so SSA will want to reclaim anything that gets direct-deposited after a beneficiary’s death.  By contrast, the incapacitated beneficiary (while living) is owed the Social Security or SSI funds in every case—so reclamation would probably only occur if the funds were misapplied.  A bank would normally not have any liability where there is misapplication of funds, unless the funds were handled improperly to begin with, by being deposited either (1) to an account controlled by someone who has not obtained approval to act as a representative payee, or (2) to an account not styled to indicate a fiduciary capacity, as required by SSA.)

If circumstances require a representative payee, SSA prohibits mixing the beneficiary’s funds with other funds.  This means that Social Security funds cannot be combined with funds belonging to others.  It also prohibits placing Social Security funds in any account that is accessible by someone lacking a fiduciary duty toward the Social Security beneficiary.

2. Correct Account Styling

Following are examples of correct ways to style a bank account to which Social Security funds are being deposited for a Social Security beneficiary who is no longer able to manage his money. (In each case, assume that John Doe is the impaired Social Security beneficiary, and Mary Smith, his daughter, is a representative payee appointed by SSA.  In some cases she also may be a guardian or trustee, or may hold a power of attorney.)

(a) John Doe Guardianship, by Mary Smith, Guardian.  (Assumes Mary is also a representative payee.)
(b) John Doe Living Trust, by Mary Smith, Trustee.  (Assumes Mary is the successor trustee and also a rep payee.)
(c) John Doe by Mary Smith, POA.  (Assumes Mary is also a rep payee.)
(d) John Doe by Mary Smith, Representative Payee.

The styling in all these examples shows only one underlying owner on the account, which is John Doe, the impaired Social Security recipient; in each case, the styling also indicates some type of fiduciary relationship (as recognized under state law) with respect to the beneficiary; and in each case, it is stated in my assumptions (as required) that Mary Smith has been approved by SSA as a representative payee for John Doe—in addition to whatever authority she may have as guardian, trustee, or person holding a POA.

There are two situations where SSA does not require the underlying beneficiary’s name to be on the account.  One of these involves a representative payee (usually a surviving parent) who is raising a minor who is an SSI beneficiary.  In this case, the funds are permitted to go into a general household account that is not in the minor’s name.  The other situation involves an organizational representative payee (such as a nursing home) that sets up a “collective account” combining funds of multiple payees.  (There are many separate owners of funds in a “collective account,” so it not possible to put all of their names on the account.)  Following are examples of account styling using these permissible exceptions:

(e) Janet Jones [the parent/rep payee’s personal general household account; minor’s name not shown; status as rep payee exists but is not shown].
(f) Sunnydale Nursing Home, representative payee for Social Security beneficiaries.

The following are examples of accounts that are not appropriately styled to receive Social Security funds:

(g) John Doe [with Mary Smith as authorized signer].  (Styling does not indicate that Mary Smith has rep payee or other fiduciary status. John Doe cannot have signing authority—but probably does with this styling.)
(h) John Doe and [anyone], joint tenants.  (Account cannot have owner other than John Doe; John Doe must not sign; account lacks indication of fiduciary duty over the funds by anyone.)
(i) John Doe Living Trust, by John Doe and Mary Smith, Trustees. (Probably won’t work unless John Doe can be removed as a trustee:  He cannot have continuing authority to sign on the account.  Mary should be a rep payee.)
(j) Doe Family Trust [a joint trust of John Doe and Jane Doe], by John Doe and Jane Doe, Trustees. (Probably won’t work with two owners. Also, John Doe cannot have continuing authority to sign on the account.)

Below I discuss why accounts with various forms of account styling will work, or won’t work, if the account receives Social Security or SSI funds for a minor, an incompetent person, or a person unable to manage his own funds. 

3. Guardian/Rep Payee

If a judge determines that a Social Security or SSI beneficiary is legally incompetent and SSA also approves the guardian as a representative payee, that guardian can then control both the Social Security (or SSI) funds and other assets belonging to the same individual.  From an SSA standpoint, all of the individual’s funds can be mixed into one account (styled as a guardianship account, without using the terminology “representative payee”).

The guardianship account meets SSA’s requirements for an appropriate account to receive Social Security funds because (1) the beneficiary receiving Social Security benefits is the only underlying owner of that account, and (2) the guardian has a fiduciary duty (for state-law purposes) with respect to all funds in the account.  A guardian has legal authority under state law to make non-Social-Security deposits and to spend those funds properly for the individual’s benefit.  This state-based authority, combined with the also-required authority of a representative payee who can receive and spend Social Security funds, covers all necessary activity on the guardianship account. 

In many situations an individual’s mental condition is unsound, but a guardianship proceeding is never held.  (No court has been asked to determine that the person is “legally” incompetent.)  Most families would prefer to avoid a guardianship proceeding:  Legal costs are expensive; and proving in court that a loved one is “incompetent” can be emotionally wrenching, or humiliating.  

4. Successor Trustee/Rep Payee

It’s increasingly common for individuals to form living trusts—not just to avoid probate, but also to name a successor trustee who can take control of assets (without a guardianship) if the grantor of the trust becomes impaired.

Living trusts typically provide some objective standard for determining when a successor trustee has authority to take control based on the grantor’s  “incapacity.”  The specific test of incapacity may vary.  Many trusts–not all– require a doctor’s letter (or two doctors’ letters) indicating that the individual has become incapacitated or is no longer able to manage his financial affairs.

A trust agreement is a type of contract, granting certain authority to the trustees, including successor trustees.  When the test of incapacity as stated in the trust agreement is met, the successor trustee is entitled by contract to take over.  One should not assume too much, however, because a doctor’s opinion that an individual cannot take care of his finances (if that is the test triggering a successor trustee’s authority) does not amount to a determination by a court that the grantor is “legally incompetent.”  Nevertheless, in almost every case where a doctor says there is “incapacity,” the individual’s condition is bad enough that the SSA is also likely to determine that the individual is “incapable of managing his money”—in which case, a representative payee will be required.

Therefore, as a standard procedure, when a successor trustee comes into the bank, presents a doctor’s letter, and asks to take over management of a trust, the bank should strongly insist that the successor trustee apply to become a representative payee for the grantor of the trust.

The trust’s grantor probably set up his Social Security checks for direct deposit to the trust’s deposit account, before his condition deteriorated. Unfortunately, this authorization for direct deposit is considered to terminate automatically upon the grantor’s incapacity.  To continue the direct deposit to the trust, SSA wants the resulting trustee to apply for approval to become a representative payee.  Once approved, the rep payee can take over management of the beneficiary’s Social Security funds, and can give a continuing authorization for direct deposit of those funds to the trust’s account.

SSA wants to interview the successor trustee before approving that person as representative payee.  SSA will ask the trustee—or other rep payee applicant–(1) to explain why the beneficiary cannot manage his own money, (2) to promise to spend Social Security funds only for the individual’s benefit, and (3) to agree to pay back any funds spent improperly.  SSA will also ask whether there might be other relatives that are also closely interested in the beneficiary’s wellbeing. SSA inquires whether the rep payee applicant has any felony convictions or outstanding felony warrants.  After appointing the trustee (or other person) as a representative payee, SSA will impose a layer of continuing accountability by requiring the rep payee to make an annual report of how Social Security funds are spent.

A trust agreement is designed to provide a smooth transition, with a replacement trustee taking over all financial matters at the appropriate time.  It might seen unnecessary for a trustee to go through the additional step of applying to become a representative payee, but because of SSA’s role in assuring that Social Security funds are properly managed for every incapacitated beneficiary, SSA insists on following a standard procedure in every case.  
Similar to the situation with a guardianship account, SSA will allow Social Security payments for an incapacitated person to be deposited to a trust account if certain conditions are met:  (1) The trustee has been approved as a rep payee, (2) the Social Security beneficiary is the only underlying owner of the account to which the Social Security funds are deposited, and (3) the beneficiary cannot sign on the account.

Of course, a remaining (still competent) trustee of the trust (if any), or a successor trustee, as the case may be, has authority under the trust agreement to manage all trust assets that are not from Social Security. Approval as a representative payee adds the additional authority from SSA to manage Social Security funds.  The trustee then is allowed to mix all funds (Social Security as well as non-Social-Security funds) in the same trust account.  All funds are held under a fiduciary duty to the person who is the Social Security beneficiary, and no “non-fiduciary” funds are mixed with SSA funds.
5.  POA/Rep Payee

  Another way of dealing with the possibility of future incapacity is a durable power of attorney (POA).  A POA is a means by which a trusted relative or other person can step in to manage the individual’s assets if that individual becomes unable to do so at a future time.

SSA does not automatically recognize a “bare” holder of a power of attorney as an acceptable person to manage Social Security benefits for an incapacitated beneficiary.  SSA insists upon imposing its standard representative payee procedures as a safeguard for the Social Security beneficiary.  Therefore, the Social Security funds belonging to an incapacitated recipient cannot be deposited to an account controlled by someone holding a POA, unless the person with the POA also applies and is approved as a representative payee. 

In many states, a person holding a POA is not considered to have a fiduciary role.  However, Oklahoma law, as provided in 58 O.S., Section 1081, is different. A person holding a POA in Oklahoma is subject to the same standards of conduct and liability that apply to other fiduciaries. 

I conclude that an Oklahoma account styled as being “by POA” is a qualifying account for depositing Social Security funds for an incapacitated beneficiary, assuming that the holder of the POA is also approved as a rep payee, because (1) the account is one on which the underlying beneficiary is the sole owner, and (2) by Oklahoma law the person holding the POA has a duty of trust. 

Using an analysis similar to a trust account, above, if the person holding a POA has both (1) a representative payee’s authority and duties with respect to Social Security funds, and also (2) fiduciary duties with respect to all other assets that may be deposited into the account, there should be no problem in mixing Social Security funds and other funds in the same account.

There are two options for drafting a power of attorney, as to when it will become effective. The first approach is to make the POA provisions effective immediately–though the person to whom the POA is granted may choose not to exercise that power until a later time.  The second option is to grant a power of attorney that does not take effect before incapacity. This POA is triggered by obtaining a doctor’s opinion in writing that the person granting the POA is now incapacitated, or unable to manage financial matters. 

If a POA is drafted using the first approach, the person holding the POA can step up at any time to start making transactions.  (No doctor’s letter is ever required.  The person holding the POA just decides to take over—for any or no reason.)  This is a very “indefinite” situation from the bank’s standpoint, because it doesn’t give a clear signal whether the owner of the funds has become incapacitated.  When the person holding the power of attorney decides to take over, the bank at least should inquire into the situation, and should inform the person holding the POA that he will need to apply for permission to act as representative payee as soon as the Social Security beneficiary becomes unable to manage his money.

In the second option, a doctor’s letter usually will have to be presented to the bank to prove that the person holding a POA is now entitled to take over.  Until the bank sees a doctor’s letter, it may be unaware that the customer’s condition is already bad enough to require a rep payee.  But as soon as the bank has knowledge (in the form of such a letter), there is potential liability for the bank if the incapacitated beneficiary’s Social Security funds continue to be deposited without a representative payee being appointed.  The doctor’s letter should alert the bank to insist on representative payee status.

6.  Only a Rep Payee

There are situations where a Social Security recipient has absolutely no income or assets except for the Social Security payments being received.  (This is most likely to be true if the individual is already in a nursing home, supported by Medicaid.)  Where the individual has no guardianship in place, no trust, and no power of attorney, the opportunity for someone to obtain authorization as a representative payee can still be an effective way to manage the Social Security payments and spend them appropriately for the individual’s benefit. 

What everyone (including a bank) needs to realize, however, is that “representative payee” status is very limited in what it authorizes the person to do.  A rep payee who lacks separate authority as a guardian, trustee or POA is not authorized to deal with any non-Social-Security assets. For example, the rep payee (without other authority) has no ability to endorse other checks payable to the incapacitated person; has no authority to deposit other funds to the rep payee account; and cannot spend any other funds belonging to that individual.

Sometimes, family members will have some miscellaneous check belonging to the incapacitated person (a small oil and gas royalty check, a bit of rental income, or—as about to occur in the next several months—a federal tax rebate).  If there is no other way to deal with such a check (in other words, if no one has separate powers under a guardianship, trust or POA), the rep payee may attempt to deposit such funds to the rep payee account.  (The bank will have an “improper negotiation” problem on any such check deposited to a plain rep payee account, and must say “no.”) 

Banks commonly proceed on the approach that a check payable to the payee can be deposited to the payee’s account without endorsement; but this logic breaks down with a rep payee account and a non-Social-Security check.  The problem is that the incapacitated beneficiary never authorized the rep payee account and never approved the rep payee to act for him.  (SSA approved the rep payee to open the account and to spend Social Security funds, but SSA cannot and does not approve the rep payee to deposit or spend non-Social-Security funds.)  With no separate authority as guardian, trustee or POA, there simply is no basis under either federal or state law for non-Social-Security assets to be placed in a rep payee account.

When a bank sets up a rep payee account (and the individual does not have separate authority as guardian, trustee or POA), the bank should stress very strongly to the rep payee that other funds cannot be deposited to the account.  The bank also may want to periodically monitor account activity on rep payee accounts.

For a representative payee whose only authority is granted by SSA, there obviously is no way to go beyond what SSA allows. As one example, SSA prohibits mixing Social Security or SSI funds with any other funds (if there is not also some fiduciary authority over those other funds).  SSA specifically states that a rep payee has no authority over income from other sources.  Rep payee status alone (combined with nothing else) gives the rep payee no authority to enter into binding contracts of any kind on behalf of the beneficiary, except those required in order to manage and spend Social Security funds. 

SSA provides that an incapacitated Social Security or SSI beneficiary must not have direct access to the funds in the account (can’t be a signer; can’t have a debit card).  If the individual is in bad enough shape to need a rep payee (can’t manage his money), he shouldn’t be allowed to access that money.

The rep payee account cannot be a joint account, and the rep payee must not have any ownership in it.  SSA also provides that any saved benefits in the account belong to the incapacitated individual’s estate upon that person’s death.  With no authority flowing from SSA that would allow “estate planning,” a rep payee lacks the ability to put any POD provision on a rep payee account.  (I understand why the rep payee wants to add a POD provision; but it’s simply “too late” to deal with such issues after the individual has become incapacitated.)

 7.  Only an Authorized Signer

An elderly person (before becoming incapacitated) often establishes a sole-ownership account with an adult child as authorized signer. This arrangement is acceptable for deposit of Social Security funds, so long as the benefits recipient remains mentally competent and able to manage his money.  But SSA requires a representative payee to be appointed as soon as the Social Security recipient is no longer able to manage money. 

The appointment of a rep payee then triggers a further requirement either (1) to restyle the existing account as a rep payee account, or (2) to set up a separate rep payee account to receive the Social Security funds, while leaving the existing account with authorized signer in existence.  (I’m assuming there’s no existing fiduciary capacity based on guardianship, trustee or POA authority).

Under the first option, a rep payee (typically an adult child who was authorized signer) might simply convert the existing sole-ownership account to a rep payee account.  This can be done by taking the actual owner off the signature card, and styling the account as “John Doe, by Mary Smith, Representative Payee.”  This styling indicates a fiduciary status, which the account previously lacked. However, converting the account to a rep payee account (if the bank even wants to do this, instead of requiring a new account) will be a good choice only if the owner (1) has no built-up deposit balances before becoming incapacitated, and also (2) will have no ongoing non-Social-Security sources of funds.  (Only Social Security funds can be maintained in or deposited to this account). 

The second option is for the authorized signer (or someone else) to become appointed as a rep payee, and to set up a separate account as a rep payee account, to receive Social Security funds only.  In this scenario, the existing sole- ownership account also remains active, holding both any pre-existing deposit balances and any ongoing deposits that are not Social Security funds.  Among other advantages, this allows a pre-existing POD provision on the sole-ownership account to remain in place.  It also allows the authorized signer to continue to deposit and spend non-Social-Security funds. The separately established rep payee account, meanwhile, will be the one to which Social Security funds are deposited. (Funds in the two accounts cannot be mixed.)

What is clearly not an option under SSA rules (although it happens frequently) is for the existing sole-ownership account to continue just as it was before (after the owner becomes incapacitated), with nothing changing in the style of the account to indicate a fiduciary duty, with no one becoming appointed as a representative payee when the person becomes incapacitated, with Social Security funds and other funds continuing to be deposited in the same account and mixed together, and with the authorized signer continuing to manage and disburse all money in the account without any authority from SSA.  (If the bank is aware of the individual’s incapacity, it could become liable for “reclamation” of all funds direct-deposited to the incapacitated person.)

Many people will object to maintaining two separate accounts in this situation—a rep payee account, and another account by authorized signer. They don’t want the inconvenience of two accounts, the possibility of two monthly service charges (although “senior” accounts are often free), or the requirement to maintain two separate checkbooks.  But SSA wishes to protect the incapacitated individual by keeping his Social Security funds separated in an account that imposes a fiduciary duty on the person spending the funds. (This issue is not about convenience for the signer on the account.)

When two accounts are maintained as outlined above–a fiduciary rep payee account and a non-fiduciary regular account by authorized signer–a bank logically should not allow transfers between these two accounts.  For example, there should be no online transfers between these accounts, and no “overdraft” arrangement that automatically transfers money from the rep payee account if the non-fiduciary account becomes overdrawn.

When a bank becomes aware that an accountholder with a sole-ownership account is no longer able to manage his own finances, that bank should strongly insist to the authorized signer that someone become approved as rep payee, and that a separate rep payee account be set up to receive Social Security funds.

It’s a good funds-management practice to spend first any funds in a rep payee account, for permissible expenses supporting the beneficiary.  By using this approach, it should be possible to maintain a fairly low balance in the rep payee account.  This helps to solve the problem that a POD beneficiary or joint tenant cannot be named on the rep payee account.  

(When the Social Security beneficiary dies, any small balance in the rep payee account can be dealt with by means of an “heirship affidavit”–if there is no will, and the balance is $5,000 or less; or the bank can pay the balance of the rep payee account to the funeral home after the beneficiary’s death, to apply toward the funeral bill.  Either way, probate issues can be avoided by careful planning, even though there is no beneficiary on the rep payee account.)

8. Joint Accounts

Here’s another difficult problem–joint accounts on which one joint tenant becomes incapacitated.  It’s perfectly acceptable for two retired persons to maintain a joint account, with each person’s Social Security funds being direct-deposited to the account—so long as both recipients remain capable of managing their own money.  It’s also allowed for a parent and an adult child to maintain a joint account, with the parent’s Social Security funds being deposited to the account—as long as the parent is able to manage his money.

The problem arises if a Social Security recipient whose funds are going into the joint account becomes unable to manage his money.  Technically, the authorization for depositing Social Security funds—or any federal payments—to an account by ACH is terminated by the incapacity of the benefit recipient.  The U.S. Treasury can do a “reclamation,” requiring a bank to return all deposits received in a non-fiduciary account after the bank becomes aware of the beneficiary’s “incapacity” and has reasonable time to act on that knowledge.  Banks are more familiar with a reclamation after a Social Security beneficiary’s death, but the same remedy is also a risk after a beneficiary becomes incapacitated. 

There are good estate-planning and asset-management reasons why the remaining joint tenant may prefer to leave as many assets as possible in joint tenancy accounts after the other owner has become incapacitated.  Certainly, the “joint tenancy” approach should be retained with respect to all assets accumulated before one of the joint owners becomes incapacitated, and with respect to non-federal-benefit income continuing to be received after that person’s incapacity.

However, SSA rejects joint tenancy accounts as a means of receiving and managing Social Security or SSI funds for an incapacitated beneficiary.  When one joint tenant becomes incapacitated, SSA requires the other joint tenant (or someone else) to apply for appointment as a representative payee.  A rep payee account then must be set up in the individual’s sole name (apart from the joint account) for the sole purpose of managing and spending Social Security funds belonging to the incapacitated person.  Banks should strongly insist that a representative payee be appointed, and that a rep payee account be established, in this situation.  (As suggested earlier, funds in a rep payee account can be spent first, supporting the beneficiary, to keep the account balance at a minimum. This should not cause any significant probate problem.)

A joint trust (a living trust with two grantors instead of one) raises most of the same concerns as a joint account.  Although it’s possible for more than one beneficiary’s money to be maintained in the same trust and accounted for separately, most joint trusts for husband and wife do not provide for this—as SSA seems to require.  Most joint trusts allow either spouse to spend money freely from the joint fund for any purpose, while they both are alive.  This arrangement does not seem to meet SSA’s requirements for an account to which Social Security funds for an incapacitated person can be deposited.  To follow SSA’s rules strictly, a rep payee should be appointed, and a separate rep payee account should be set up.

(An additional problem from SSA’s standpoint, with either a joint trust or an individual trust, is that the trustee who is incapacitated or can no longer manage his money cannot be allowed to continue to have access to the account.  If the trust agreement does not cause removal of the incapacitated person as trustee under the particular circumstances, the fact that the person technically remains in office as trustee makes the trust account not an unacceptable account to receive Social Security payments for that individual.)

9. Organizational Rep Payees

Representative payees are usually individuals, but SSA also allows “organizational representative payees.” There’s a general preference for appointing some relative or close friend as rep payee; but sometimes the incapacitated person is single (or a widow/widower), with no child or other close relative living nearby who is able to take on rep payee duties.  In such cases, SSA will appoint an organization as rep payee.

The most common example of an organizational rep payee is a nursing home where the incapacitated person lives.  In other cases, a benefits recipient is unable to handle his own funds because of drug addiction or alcoholism—and SSA prefers to have an organizational rep payee who is familiar with such problems (for example, a treatment or counseling center), instead of a relative or friend.  Any organization (including a church or social services agency) is eligible to apply as a rep payee, but it happens very seldom.  
An organizational rep payee is permitted to maintain a “collective account” for multiple beneficiaries. Such an account will not show the name of the incapacitated persons in the styling.  Instead, it will be something like “Happyvale Retirement Center, Inc., as representative payee for Social Security recipients.”  The organization’s operating funds must not be mixed in this account.

Collective accounts raise some unique issues.  First, the bank must use the rep payee’s TIN, because the styling begins with the rep payee’s name, and the beneficiaries’ names do not appear as part of the styling.

These accounts need to be interest-bearing if possible—so they should be set up as NOW accounts.  The organization (such as a nursing home) may be a corporation or LLC that would be ineligible to hold a NOW account for its own money; however, when the institution’s role is only as trustee for others—managing money belonging to other individuals who each separately are eligible to hold NOW accounts—this fits an exception, and the organization’s name is permitted to be on the NOW account.  

Of course, if the organization’s TIN appears on the NOW account, any interest earned will be reported on a 1099 to the organization—there’s no way around that.  But SSA makes clear that any interest earned “belongs” to the beneficiaries.  The organization is required to maintain records at all times to show how much money in the collective account belongs to each beneficiary.  Similarly, the organization must calculate how much of the interest earned on the account belongs to each beneficiary.

If any beneficiary has a balance or more than $500 that is carried over in the collective account from month to month, the organizational rep payee must put those funds in a separate rep payee account in that beneficiary’s name.

10.  Rep Payees for Children

The SSA has special rules that apply when a representative payee is holding funds for one or more minor children.  The general rule is that any savings account containing a child’s SSI funds must be styled as “child’s name, by X, representative payee.”  Each separate child’s SSI funds that are placed in savings must be held in a savings account styled in that specific child’s name. 

However, it is permitted for SSI funds for a minor to be direct-deposited to a checking account that is the personal household account of the parent who is caring for the child—without any indication of fiduciary status in the styling.  More than one child’s funds can go into this collective household account. This exception recognizes the reality that it is too hard to maintain separate checking accounts, then to split out the various monthly household expenses (rent or mortgage payments, utilities, gasoline, groceries, etc.) so as to pay a fair share from each separate child’s account, as well as a portion from the parent’s own funds.  If the money all gets spent by the end of the month anyway, requiring a parent to split expenses in this manner would serve no purpose.

If excess SSI money belonging to a child is left over at the end of the month, this should be deposited to a savings account in the child’s own name, “by X, representative payee.” In the case of minor children who are blind or disabled, a rep payee sometimes receives a large lump-sum back payment.  Lump-sum payments should be deposited to a “dedicated account” in the child’s name, to be spent only for expenses specially authorized by SSA.  (If a parent who is rep payee for a child wants to deposit a large lump sum SSI check to a personal account, this should not be allowed.)