Skip to content

Disaster Donations: 4 Issues Nobody Talks About

June 22, 2015

When disaster strikes, you feel compassion for the victims. You want to help, but what can you do? The easiest things you can do are pray and give. Your prayers really do make a big difference, but what happens to the money you give? Do your donations to disaster victims really help? I can tell you from first-hand experience, that your donations are absolutely essential to their recovery! Do not let negative media reports or social media posts deter you from generously giving to those in need. However, when you give, you do need to know a few things about what happens to those donations.

When the fertilizer plant explosion in West, TX killed 15 people and damaged or destroyed half of our town, I began to work to help our community recover and I learned a lot about that process. I won’t take time here for all of the lessons I learned, but I do want to point out 4 issues related to disaster donations that I had to learn the hard way because nobody ever talks about:

1) Organization for Distribution of Funds

There are two types of entities which can appropriately distribute funds after a disaster. In some cases, the city government can distribute funds, however, usually there is a nonprofit organization that assumes that responsibility. As I understand it, a city can distribute donated funds to its citizens by categorizing them and giving certain amounts to people in each category. For example, if you lost a loved one you receive a specific amount; if you suffered an injury, you receive a specific amount; if you lost your house you receive a specific amount, etc. Funds can be distributed quickly that way, but many needs will be overlooked and recipients may have to pay income taxes on the money they receive. If a 501(c)(3) “nonprofit organization” distributes the funds, donors can receive tax deductions, victims’ needs can be assessed on a case-by-case basis to make sure the donated funds meet needs in the most efficient ways, recipients will not pay income taxes on the money they receive, and the nonprofit organization can coordinate with other entities and to increase resources for victims. After the bombing in Boston, the city had a unique partnership that allowed them to used both types of entities for donation distribution. The city oversaw the distribution, but a 501(c)(3) was formed as the fiscal agent. That was the first time that an organization was approved as a 501(c)(3) for the purpose of “lessening the burdens of government” in disaster fund distribution. (See this blog post by the lawyers of One Fund Boston.) In our case, the only person at City Hall who might have been able to organize a fund distribution program, our City Secretary, was one of our first responders who was killed in the explosion, so our only option was to take the advice the Texas Department of Emergency Management and establish a 501(c)(3) organization.

2. IRS Policies Adversely Affect Victims

The IRS has published a document in which they explain how a 501(c)(3) organization can distribute funds after a disaster. You can find that document here. Unfortunately, the IRS argues in that publication that a nonprofit organization cannot distribute money to people just because they were victims of a disaster. Instead, the victims have to demonstrate their need.

“Under established rules, charitable funds cannot be distributed to individuals merely because they are victims of a disaster. Therefore, an organization’s decision about how its funds will be distributed must be based on an objective evaluation of the victims’ needs at the time the grant is made.”  IRS Publication #3833, p. 11
“An organization must maintain adequate records to show that the organization’s payments further the organization’s charitable purposes and that the victims served are needy or distressed. Charities must also maintain appropriate records to show that they have made distributions to individuals after making appropriate needs assessments based on the recipients’ financial resources and their physical, mental and emotional well-being.” IRS Publication #3833, p.13.
In my opinion, those statements establish a bad policy. I think donated funds should be distributed appropriately, based on what was lost, not necessarily on the proof of need. In other words, victims of a disaster should receive donated funds regardless of whether or not they have a savings account. When we have a bad law or bad policies, we have three options: 1) we can ignore the law and risk being penalized or punished, 2) we can accept the law and abide by it, or 3) we can abide by the law, but try to change it. I choose the third option. I am working on a plan in which I hope to contact the appropriate decision makers and encourage them to amend the current IRS regulations so that a 501(c)(3) can help victims of a disaster if the victims can demonstrate loss, instead of need.
3. Disaster Relief Is Not The Same As Disaster Recovery
There are two major phases in disaster response. The first phase is short-term disaster relief. The second phase is long-term disaster recovery. The first phase begins immediately as volunteers, local charities, churches, and government agencies all work together to establish safety and provide essentials like food, shelter, and clothing. There is not a clear transition from the first phase to the second, but they overlap as the community gradually moves into long-term recovery. In this phase, people need assistance with medical bills, insurance claims, utilities, construction, legal issues, etc. While the first phase can last a few days to a few months depending on the nature of the disaster, the second phase can last a few months to many years. When you give money, your donation will either be used for short-term disaster relief, or long-term disaster recovery. If you give to a local church or an established charity, that money will most likely be used for immediate relief. If you give to the big, well-publicized funds that are established after a disaster happens, you will most likely be giving to the long-term recovery efforts. Because of the IRS restrictions described above, the 501(c)(3) will only be able to distribute funds that meet long-term needs.
So should you give to churches and local charities or should you give to the big funds that are established after a disaster? The answer is give to both! The needs are real in both phases. You just need to understand which phase you are supporting. Do not expect that money given to a local church will last long enough to help someone pay their medical bills, or that money given to the big fund will be immediately available for victims to get food or clothes. The recovery efforts in West worked well because we had a tremendous outpouring of donations and resources for short-term relief and we received generous donations for long-term recovery as well. In the first few months, millions of dollars were distributed through monetary gifts, gift cards, vouchers for gas and food, prescriptions, clothing, and many other goods and services. Then when victims started construction, or received medical bills, or needed to replace vehicles, etc. the long term funds were there to help.
4. Forced Mortgage Payoffs
There is an all-too-common practice that is completely unfair and we need to find a way to keep mortgage companies from further victimizing people in this way! The scenario that bothers me looks something like this:
Let’s say Joe has a good job, makes his mortgage payment every month, and carries good insurance on his home. A terrible disaster destroys his home, but he will be alright because he has insurance, right? Not necessarily. The mortgage company steps in and takes all of the insurance money to payoff the mortgage! Now Joe, who did everything the right way, has no house, and no money to pay for a new one! The mortgage company got theirs, but Joe is left out in the cold.
I think that as long as Joe continues to make his mortgage payments, and as long as he can prove to the mortgage company that he is rebuilding a house that is comparable to the one that was lost, he should be able to use his insurance money to accomplish that. The mortgage company can even hold the insurance money and disburse it to the contractor as appropriate. When it’s all done, Joe will have a house and the mortgage company will be exactly where they were before the disaster. Actually, they will be better off, because the house will be worth more since it is newer, and if they ever have to foreclose they will make more money off the deal! If you ever experience a disaster, or if you have opportunity to advise someone else in a disaster, warn them of this practice and try everything you can to communicate with the mortgage company to avoid this devastating trap.
We need to start conversations about these four issues so more people will be aware of them before the next disaster strikes. We also need to encourage law makers to make some changes that will help victims in the future.

From → Uncategorized

Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: