I was doing some thinking the other day about taxes and bank accounts and whatnot when an unusual question occurred to me. The following is purely a hypothetical situation and not at all a request for legal/financial advice in any real-world matter, but I’ve somehow become very curious as to what the rules would be in the US for a situation like this.
Suppose I have a friend who has $10,000 of legally-acquired money, and this friend has every intention of filing the necessary taxes and so on for this sum. However, for some reason, this friend decides he doesn’t want to go through the hassle of setting up a bank account, and so he says to me “Here, hold onto this $10,000 for me in your bank account. I’ll call you in a few months when I need it.”
For starters, does the money still legally belong to him, despite being in my account? Or is it considered some kind of “gift”? Would the IRS notice the in-and-out activity on this account, and raise an eyebrow, thinking I’m trying to pull a fast one on them? And whose responsibility would it be to pay any taxes on the interest it may earn while in the account? Assuming we are in fact good friends with no plans for treachery, would it be necessary to draft a paper contract describing these actions we’re taking, or would our verbal agreement suffice?
It’s most likely a trust, with you as the trustee, and your friend as the settlor and beneficiary. In the absence of a clear agreement to the contrary, you must deal with the money as your friend directs, and return it to him on demand. Any interest, etc, earned on the money is his, and you must account to him for it. You would be wise to keep his money separate from yours, e.g. by opening a distinct bank account to hold it.
It’s not essential that this be recorded in writing, but it is advisable - if only so that you can demonstrate to the revenue authorities that it is not a gift to you, and that the interest it earns is not your personal income.
It’s done all the time. More frequently than you probably think.
When you open a bank account, the bank is holding the money, but it’s yours.
“Jim, here’s $8.00, go across the street and buy me a pack of cigarettes”. Even though it’s only for 2 minutes, Jim his holding my money.
10 years ago, I wrote a check for $16000 to an attorney who put the money into his own bank account. It was still my money because it was a deposit on a house that I was purchasing.
Based on the OP, it’s a bailment, in general (see Northern Piper’s message).
The bank relationship is a different relationship all together.
It’s not a trust unless one duly fills out the proper paperwork in accordance to the state law in which the trustee account resides (for the US). There’s also fraud considerations to account for as trust instruments afford a lot of protections in law.
Not sure of the exact legailty (IANAL) but unless you are holding the exact cash (“Hey, these aren’t the same serial numbers! Gimme my money!”) it’s not bailment. You are essentially taking on a debt. This would be a form of verbal(? Unelss written down)) contract. I take money, I hold it for you, I return money. I guess the picky details would be what benefit you get for holding my money. Goodwill and friendship? Appreciation (not the financial sort)? It’s a loan? As long as you have the money to give back, you can spend it or whatever however you want meantime?
As for the legalities… Depends on the local interpretation of income tax statutes and money laundering statutes.
Showing any intent to avoid the picky details of cash tracking laws might be interpreted as money laundering - say, depositing much less than the full $10,000 in installments for no good reason. Or, if you do deposit $10,000, lying about the source of the money… Banks now, due to terrorism laws, may report any suspicious transactions, so they authorities may be alerted over a series of large cash deposits well under the $10,000 limit. Once the authorities start investigating, they can certainly determine if ALL the cash your friend acquired was legit. If they have questions, you may be along for the ride and may need that $10,000 for the lawyer.
Not sure what the rules are for income tax in the USA; in Canada, gifts are not taxable; so a gift of a large sum of money has no income tax implications, but they do have money-laundering rules. I guess if your state says it’s a taxable gift, it’s up to you and your lawyer to prove them wrong. Documentation would help.
While a legal trust may require all sorts of fancy legal work and licenses, the implication “I am holding this for you” is a contract or debt (you are agreeing to return it) and so it is enforceable if the judge believes (preponderance of evidence) that his version is correct and you owe him.
Many jurisdictions have some regulations on investment, so unless it went right into the bank, if you invest it in anything intresting on his behalf, you may be acting as an inlicensed investment agent of some sort.
Basically you are taking on a big risk for no reward. The only real reward is if he gets hit by a bus before he collects his money back and nobody else knows about the debt…
This is not a bailment, at least not in the traditional sense. This is a bank deposit and is governed by a whole host of other laws.
This is also a bailment.
Technically, this is only a bailment if the bailee is following his ethical code of conduct for his state (e.g. he might not have the authority to mix funds), and there was some sort of agreement stating that the bailee will hold the money in escrow for the house purchase.
No, it is more likely to be a bailment than not.
It is not debt that the bailee (the money holder) is taking, but rather, liability.
Depending on the state (in the US), use of the money other than for its intended purpose would be a violation of common law bailment or the state law for bailment. [snip tax discussion and money laundering discussion]
The transaction would not be like depositing money in a bank because of fractional reserve banking, correct? If you hold money for someone, I’m assuming you wouldn’t be expected to loan it out. A bank holding your money would be allowed to lend out about $9,000 of the $10,000 you mentioned, and if you demanded it back they would use the 10% reserves from others they’re holding money for to pay you.
Interesting to know this is covered with a legal concept. I have just such a relationship with a friend; I hold cash for her, to which she adds more each pay day, as an emergency reserve that her husband can’t discover and then plunder for motorcycle gear and guns. She’s avoiding using a bank, to avoid having statements sent to her house that could alert him that the money exists. The amount has grown enough that I’d suggested having a bank account in my name, or her name with my address to receive statements. Any pitfalls to these (beyond the risk she takes in trusting me)?
There may be rules against this where you live, but my bank offers online statements (you have to login to the bank’s online banking portal in order to get your statement).
Is this an option with your bank? That way the account could be in her name and she won’t be receiving statements at home.
Warning - the bank will most likely send a reminder email when a statement has been posted and the email will include a link to th online statement. If hubby has any chance of reading the email, he is likely to learn about the account.
Even without a monthly email, if the bank makes changes to the account or the website or is bought by another bank, an email notice will be sent.
Almost any bank will occasionally send junk mail. When the wife starts getting postcards and letters in the mail that say “Special car loan offer to our most valuable customers” or whatever, he’ll know something is up. Even if she gets online statements, the bank may send legal notices or tax statements in the mail.
And if, for some reason, a check bounces they will return the check by mail. I once had a checking account that I seldom used and deposited a perfectly valid check in their ATM. They did not even try to present the check for payment. They decided that depositing a check for over $500 in an ATM was a “security risk” and mailed it back to me with a note stapled to it that I must present it in person to a teller. My point isn’t that this bank provides bad service (it does), but that unexpected mail happens.
And, if the account pays any interest, she will have to report it on their tax return, which the husband will see if they file jointly.
It’s not necessary to keep your friend’s money laying around the house in cash and could be foolish if it’s a lot of money. You can put it in an account of yours and just keep a ledger showing how much money is hers.
If you want to keep her money in a separate account with maximum privacy, I suggest that you open an account with yourself as the sole owner, but name her as a “Payable on Death” beneficiary and also name her as an authorized signer (not an owner). That way if anything happens to you, she will be able to get at her money without you.
Well, there’s the obvious: You’re hiding money from a man with a motorcycle and a gun. If he finds this out somehow, is he likely to get on the one while waving the other, to come visit you? What sort of mood might he be in?
Eh, it’s not that he’s dangerous, he’s just a “bro” type of guy who likes spending money on toys, has no head for budgets, and who has bad credit which is making it difficult for them to get financing on a home purchase. She’s the boss of the house, if he did discover that I was her “savings plan,” she’d be able to shut him down pretty quickly.
What Alley Dweller mentions about the foolishness of holding this much in cash in my apartment is my big issue for wanting to get it into a bank. Thanks for the advice!
I can’t get past this part. You are ASSUMING he got it legitimately. But “For some reason” may include:
–The money was NOT legally obtained, and there are others looking for it, most likely dangerous others, and the money could lead to you and a date with a shotgun in your mouth
–The friend is looking to stash the money temporarily because of ill gotten gains, which technically could be misconstrued as money laundering, and guess who is the launderer? Especially if you put in a bank. Because, if you don’t, and hide it under a mattress, and it gets stolen, you now have a problem with the friend. Since you are going to the bank anyway, why not take your friend with you, and help them set up a bank account on their own? If they refuse, then something is very suspicious.
–Your friend is mentally ill or mentally incompetent, and again, your agreeing to be the white knight and stashing his cash could be misconstrued as taking advantage of them
Im sorry but I have a problem with the very premise of the question; if my most trusting, dearest, most honest friend dumped a cold ten thousand on my dining room table and asked me to stash it for them, a million and one bells would go off in my head.
The scenario can be perfectly simple - and I’ve actually done this.
We had recently bought a house with a mortgage. Friend had a sum of money he wanted to invest in something - not fussy what - but reasonably secure, and with no penalty for early withdrawal of his money. Our mortgage had the facility to make extra payments, and withdraw whenever.
Interest rates at the time were something in the order of 7% for our mortgage, 5% for a term deposit. So he invested in us at a rate of 6%. We were happy (1% less to pay), he was happy (1% more to receive), we trusted each other and kept good, signed records. A couple of years later he took out his money and went off to Europe where he used it as a deposit for his own house. Since everyone had behaved ethically (we didn’t embezzle his money) - no problems.
I wouldn’t want to do this with anyone who wasn’t pretty trustworthy though.
