How can i set up an fundraiser account where other friends can contribute to help family of a deceased friend?

You need to go to a local bank and setup an account- tell them what you're trying to do. You might need power of attorney- not sure about that. You then setup a web page with a pay-pal account. The donations form the paypal account are linked to the bank account you setup when you setup the paypal account. The family you're trying to help should also have access to that account and can usethe money whenever they want. Or, even easier, setup a paypal account using the existing family's account information and that saves many steps.

If you are setting up a website to coordinate the effort, I suggest that you use Chip-In. It's a great widget that you can add to your website to provide an easy way to collect funds for a specific event. http://www.chipin.com/

Create a website through Geocities, then go to Paypal and paste the info for setting up a donations account there and send the site url everywhere.

I wrote an article on the subject that should help you out with this.

Just go to the bank and explain your situation. A good bank will know exactly what to do. If they hesitate or balk, leave, go to another (and tell everyone how you were treated...good or bad). Ask for a waiver of fees.