Slidees Chapter 16 Flashcards
(13 cards)
Private Trust
Purpose
For the benefit of a an ascertainable beneficiary.
Modification
Claflin doctrine
Deviation
Enforcement
Beneficiaries
Charitable Trust
Purpose
For the benefit of a charitable purpose.
Modification
Cy pres doctrine
Deviation
Enforcement
State Attorney General
Other
Exempt from RAP and certain taxes.
Charitable purposes include:
(a) the relief of poverty;
(b) the advancement of knowledge or education;
(c) the advancement of religion;
(d) the promotion of health;
(e) governmental or municipal purposes; and
(f) other purposes that are beneficial to the
community.
Restatement (Third) of Trusts §28 (2003)
Tax Purposes
Donations to a charitable trust have significant tax benefits.
Individuals who itemize may obtain a charitable income tax deduction under section 170.
Charitable transfers are free from gift tax under section 2522.
An individual can receive an unlimited charitable deduction from estate taxes for transfers to qualified charities.
Qualifying charitable trusts are themselves tax-exempt, which means they are (mostly) free from income taxes.
Modification of Charitable Trusts
Charitable trusts may last perpetually, which is a very long time.
Therefore, rules for modification are more liberal for charitable trusts than private trusts.
Under the doctrine of CY PRES, the purpose of a charitable trust may be modified to adapt to changed circumstances.
Under the doctrine of DEVIATION, administrative provisions may be changed to adapt to changed circumstances.
Deviation in the Uniform Trust Code
UTC §412. MODIFICATION OR TERMINATION BECAUSE OF
UNANTICIPATED CIRCUMSTANCES OR INABILITY TO ADMINISTER TRUST EFFECTIVELY.
(a) The court may modify the administrative or dispositive terms of a trust or terminate the trust if, because of circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust. To the extent practicable, the modification must be made in accordance with the settlor’s probable intention.
(b) The court may modify the administrative terms of a trust if continuation of the trust on its existing terms would be impracticable or wasteful or impair the trust’s administration.
(c) Upon termination of a trust under this section, the trustee shall distribute the trust property in a manner consistent with the purposes of the trust.
Uniform Prudent Management of Institutional Funds
UPMIFA
Applies to charities managing their own funds.
It most commonly applies to nonprofit corporations, but also some charitable trusts.
Many of the theories that underpin the Uniform Prudent Investor Act are also articulated in UPMIFA.
Enforcement of Charitable Trusts
Charitable trusts differ from private trusts in terms of their enforcement, because charitable trust need not have ascertainable beneficiaries.
The State Attorney General (or designee) is the traditional enforcer of charitable trusts.
In some states, donors (and sometimes their representatives) also have standing.
Other parties may also play enforcement roles, but standing is limited.
Special Interests Doctrine
Sometimes, identifiable beneficiaries of a charitable trust may have standing to sue if they have a specific interest directly affected by the trustee’s breach.
Relators
A relator is a private person who sues a charity on behalf of the attorney general. Statutes authorizing this are uncommon. More commonly, a state charitable official, identified through NASCO, will serve in the role of the AG.
Internal Revenue Service
The IRS exercises significant supervisory control over charitable organizations because of their need to maintain tax-exempt status.
Organizations file an initial application for recognition of tax exempt status, Form 1023, with the IRS.
Organizations also file annual returns; generally Form 990, but Form 990-PF for private foundations and occasionally other forms are used.
The IRS has the ability to:
(1) impose intermediate sanctions tax penalties for
abusive transactions by tax-exempt organizations or
(2) revoke tax-exempt status for egregious actions. A
variety of penalty taxes relevant to certain behaviors
of private foundations may also be assessed.
Role of the General Public: The Bishop Estate
“Broken Trust” published by prominent community leaders, calls for investigation of trustee selection and administration of the trust.
AG uncovers numerous irregularities;
Two trustees are indicted.
In 1998, IRS audits and finds:
Estate not operated primarily for charitable purposes;
improper involvement in political campaigns;
trustees’ fees in gross excess of value of services;
and numerous instances of private benefit.
IRS revokes charitable tax exemption retroactively, but offers to reconsider on resignation or removal of trustees.
Drafting Considerations
to create short-term trusts so the donor, or perhaps the donor plus one generation, can control the distributions,
to draft the donor’s intent clearly (easier said than done but worth thinking about),
to draft in flexibility but not so much that successor trustees can wander off mission,
to provide mechanisms for modification if changes are needed so that the donor has some control of the process and so that court costs can be avoided,
to provide for standing for the donor, although it remains unclear whether this will work, and
to include an arbitration clause to use if disputes later arise.
