Permission is granted for John E. Mayer to post the following issue of Charitable Gift Planning News on his website.


Charitable Gift Planning News

September 2000

Vol. 18/No. 9




CRT That Fails to Make Distributions is Not a CRT


Estate of Melvine B. Atkinson v. Commissioner, 115 T.C. No. 3 (July 26, 2000), answers a question that haunts many a gift planner. What if a charitable remainder trust is drafted correctly, contains all the necessary language and none of the forbidden provisions, but in practice the trust is not administered in accordance with its governing instrument? The answer may not be unexpected, but it is harsh – the trust is not a qualified CRT and the charitable deduction otherwise allowable will be denied.

The facts were complicated, but in essence here is what happened. Melvine B. Atkinson of Miami Beach, Florida, created a charitable remainder annuity trust in 1991 and placed stock worth just under $4 million in the trust. The terms of the trust called for payment of a five percent annuity to her, in quarterly installments of $49,999.68, but no such payments were ever made. The court stated that the trustee, one Christopher J. MacQuarrie, was aware of the required payments and of the fact that Atkinson “was not withdrawing money from the trust.”

She died in 1993, at the age of 97, and the trust called for further lifetime distributions to other individuals, but only if they agreed to pay the State and Federal death taxes due on their interests in the trust. Mary Birchfield was the only one of these secondary life beneficiaries who elected to take her share, but she claimed that Atkinson had promised that she would not have to pay the taxes on her share. After “increasingly hostile exchanges,” the estate settled the claim and got a probate court order permitting the taxes on Birchfield’s share to be paid out of the estate, but the assets were insufficient so the CRT will have to be invaded to make up the shortfall.

When Atkinson died, the trust was included in her estate for Federal estate tax purposes. Her estate would be entitled to an estate tax charitable deduction for the charitable remainder interest, but only if the trust was a qualified charitable remainder trust under Code. Sec. 664.  On these facts, the Tax Court held that the trust was NOT qualified, so no charitable deduction was allowed. Although the trust instrument properly provided for distributions to the life beneficiaries, in practice the trust did not operate in accordance with the terms of the governing instrument. The estate bore the burden of proof on this issue and it was unable to establish that checks were prepared and sent to the decedent. The trust was never diminished by any payments during her lifetime. For this reason it failed to meet the 5-percent minimum distribution requirement and was not a qualified trust.

The court also noted another point. While reformation is available for many nonqualifying charitable remainder trusts, that remedy is applicable only where the trust is disqualified by problems in the trust documentation. The Atkinson trust was validly drafted and thus did not need a re-formation to rewrite incorrect terms.  Its problems were operational and a failure of that sort cannot be corrected by reformation.

This case could be the most important CRT development of the year. Planners routinely encounter charitable remainder trusts that have failed in one way or another to follow the applicable rules or the terms of the trust instrument. Indeed, the Internal Revenue Service is often receptive to a reasonable attempt to correct the situation and go forward with a plan that saves the trust from disqualification. Here, the parties never did attempt to rectify the trust’s failure to make distributions. Would the result be different if they had? This answer must await future developments.

Another point worth noting is that even if this trust had made distributions as required, it could have been disqualified on another ground – the necessity to invade the trust corpus to pay estate taxes on Birchfield’s share. The IRS raised this point, but the Tax Court never had to reach it.    


Drafting 101: Identifying the Beneficiary


McDonald & Company Securities, Inc., Gradison Division v. Alzheimer’s Disease and Related Disorders Association, Inc. et al., 2000 Ohio App. LEXIS 3248, Court of Appeals of Ohio (1st App. Distr., Hamilton County). Fred Weisman died and maned as a beneficiary of his individual retirement account(“IRA”) the “Alzheimer’s Research Center.”  The securities firm administering his IRA was unable to determine with certainty the Fred intended any one organization to take this gift, and brought this suit for a declaratory judgment to resolve the situation.

 Three organizations claimed the gift: the University of Cincinnati College of Medicine Alzheimer’s Research Center (“the University”), Alzheimer’s Disease and related Disorders Assn., Inc., commonly known as the Alzheimer’s Association (“AA”) and American Health Assistance Foundation (“AHAF”). During his lifetime, Fred had given small contributions to two of these organizations: a $20 check, payable to “Alzheimer’s Disease Association ”to AA; plus a $15 check payable to “Alzheimer’s Research,” and a $25 check payable to “Alzheimer’s Disease Research” to AHAF. AHAF sponsors a program called “Alzheimer’s Disease Research. The University was a local institution bearing the same name Fred had put in his IRA beneficiary designation, but he had no apparent connection with it during his lifetime.

The appellate court upheld the probate court’s holding that the intended beneficiary could not be determined with certainty, and that Fred had indicated a general charitable intention to help patients with Alzheimer’s Disease. Accordingly, the contested funds were divided equally among the three claimants. The real lesson for planners is in the concurring opinion of Judge Painter:


“The public should realize the danger in attempting to have a substantial portion of their wealth pass to their heirs or beneficiaries by IRA accounts, brokerage accounts, insurance policies, bank-deposit accounts, and the like. Often, as here, these documents are not prepared by a lawyer, not subject to the legal formalities of a will, and not artfully completed. For someone with the substantial assets involved here, an estate plan would have been advisable, so an attorney could have reviewed all documents such as this, avoiding ambiguity and its attendant costs, and ensuring that the decedent’s wishes were followed.”


Calendar Notation Not Sufficient to Prove Charitable Contributions


Daniela Aldea v. Commissioner, TC Memo 2000-136 (4/12/2000). Daniela Aldea was a regular churchgoer and in 1995 she gave cash contributions totaling $1,160 to two churches. When the IRS challenged her deductions for lack of proof, she took her claim to the Tax Court. She testified to the court that she had made these contributions and offered two forms of proof – handwritten letters from two individuals stating that she had attended their churches regularly and a 1995 calendar with the notation “church” and a dollar amount (usually $20) on each Sunday.

Sorry, said the court, this evidence is not enough.  The judge wasn’t convinced that the calendar notations were made contemporaneously in 1995, and the letters didn’t identify any particular church nor indicate that Daniela made any contributions.

Although neither a groundbreaking case nor a surprising result, this decision does remind us that even small contributions must be substantiated. The “contemporaneous written acknowledgment” rule is inapplicable to gifts under $250, and the regulations treat contributions of $20 per week like the ones in this case as a series of separate $20 contributions, without aggregating them. Nevertheless, there are still rules to be followed. Here, the court noted, canceled checks, receipts, or “other reliable written records” showing the donee, date and amount of the alleged contributions could have saved the day. The judge seemed to doubt whether this donor had actually made any contributions.       


Life Tenant and Charity Allowed to Sell Property and Divide the Proceeds


In re Estate of Kenneth C. Hewitt. 554 Pa. 486, 721 A. 2d 1082, (12/22/98). When Kenneth Hewitt died, he left Helen Colwell a life estate in his condominium apartment, provided she notified the executor within 120 days of “her election to occupy” the apartment. At her death, the apartment was to be sold and the proceeds distributed to a charitable remainder trust created under Mr. Hewitt’s will. Mrs. Colwell sent her notice to the executor in timely fashion.

Thereafter, Mrs. Colwell and the executor sold the apartment and the proceeds were divided between her and the trust based on their respective actuarial interests. The Pennsylvania Attorney General objected, claiming that because Mrs. Colwell never occupied the apartment, she was never became entitled to any interest in the property. Thus, in the view of the AG, the entire proceeds should have passed to the CRT. The lower courts agreed with the Attorney General, but the Pennsylvania Supreme Court said Mrs Colwell could keep her share of the proceeds. She properly exercised her election to take a life interest in the property and was entitled to keep it or sell it. The remainderman (the CRT) owned the rest of the property, but its interest was subject to her life estate. These two parties were free to join together in a sale of the property and divide the proceeds according to their respective interests.

            This case may demonstrate a potential solution for parties who find themselves in this situation. Often a life tenant is either reluctant or unable to occupy the subject property, either at the outset or at a later date. This may be the case when an elderly life tenant is no longer able to live without assistance, and finds it necessary to move to an assisted care facility. A person who gives to charity a remainder interest in a personal residence or farm is entitled to a deduction for the actuarial value of the remainder, but only if the remainder beneficiary receives an actual legal interest in the residence or farm, and not the proceeds of its sale. The parties may be tempted to include in the deed a provision requiring sale of the property and division of the proceeds under some circumstances, but the IRS has ruled that this can spoil the donor’s deduction. See Rev. Rul.76‑543 , 1976‑2 C.B. 387, and Rev. Rul. 77-169, 1979-1 CB 286. As this case shows, the parties are free to arrange a sale on their own without so providing in the governing document (here, Mr. Hewitt’s will). 





Gift Substantiation Via E-Mail? (Would That Be Cybersubstantiation?)


IRS General Information Letter 2000-0070 – A taxpayer wrote to the Internal Revenue Service to ask whether the substantiation requirements of Code. Secs. 170(f)(8) and 6115 [regarding receipts for gifts over $250 receipt rule and quid-pro-quo disclosure] would be met if the donee supplied the necessary documentation to the donor in timely fashion via electronic mail. The answer – a definite maybe. IRS noted that it had not previously ruled on this issue, but said it would “probably” accept this form of substantiation.

            The taxpayer’s second question was harder. May a for-profit entity using the Internet to solicit charitable contributions for nonprofits provide the required substantiation to donors? Ask us later, in a private letter ruling request, said the IRS. This novel and complex question was deemed to be beyond the scope of what can be answered in a general information letter.




CRT May Permit Corpus Distributions to Charitable Remainderman


LR 200010035. A and B created a private foundation in 1988, and in 1994 they created a charitable remainder annuity trust for themselves with the remainder payable to the foundation. Now it appears that the trust ‘s assets have nearly doubled in value, while the foundation increasing costs have outpaced its revenues. To help improve the financial condition of the foundation, A and B now propose to reform the trust so as to permit distribution of corpus, plus any income in excess of its annuity obligation, to the foundation.

The Internal Revenue Service approved the proposed change, holding that the change would not affect either the status of the trust as a qualified charitable remainder trust under Code Sec. 664 or the tax exempt status of either the trust or the foundation. In addition, none of the parties would incur adverse income tax, gift tax, self-dealing tax, or termination tax (under Code Sec. 507) consequences as a result of these changes.

The IRS noted that the Regulations [in Sec. 1.664-2(a)(4)] specifically permit distributions to qualified charitable organizations. This is a provision that gift planners might well bring to the attention of donors when proposing or preparing a charitable remainder trust.  The donor may very well wish to authorize distributions to charity if this possibility is brought to his/her attention when the trust is created.


In Case You Wondered . . . Grantor Can Be CRT Trustee


            LR 200029031. Sometimes the results of a proposed transaction seem so clear that one wonders why the taxpayers involved felt obliged to request a private letter ruling. This is one of those rulings. A and B (no, not the same A and B as in the ruling just described) created a charitable remainder unitrust funded with publicly traded stock and named an institution as trustee. Subsequently they removed the trustee and named themselves as cotrustees, and (apparently at a later date) emended the trust instrument to prohibit investments in assets which do not have an objectively ascertainable market value and would result in disallowance of the charitable deduction.

Those changes, naming the grantors as cotrustees and limiting trust investments to assets which have an objectively ascertainable market value, do not disqualify the trust as a charitable remainder unitrust under Code Sec. 664 and the applicable regulations, are OK with us said the Internal Revenue Service.

This ruling reaches what would seem to be an obvious result, although it was so heavily redacted as to make that less than clear. After all, sometimes the reasons for seeking a ruling are hidden in such details as the amount involved (described as $x here) or other details obscured in the final ruling. One aspect of the ruling that was not by the IRS may be interesting to gift planners who are absorbed by such things. [Other readers may simply say, “Get a Life!”]

For those who are still reading, here’s something to ponder. This trust included the usual provision stating that it was irrevocable and could be amended “for the sole purpose of ensuring that the Trust qualifies and continues to qualify as a charitable remainder unitrust.” And we are told that A and B, as trustees, amended the trust to add the prohibition on hard-to-value investments. Was that necessary to ensure that the trust continues to be qualified? Stated differently, did the trustees have the power to make that amendment. The recent amendment to the regulations provides that such assets may raise problems for a unitrust unless the annual valuation is (1) performed by an independent trustee, or (2) determined via a current qualified appraisal. This ruling even cited and described this regulation. So why would this amendment even be permitted under the instrument, let alone be necessary to assure continued qualification?

Compare this apparent failure to follow the terms of the trust instrument with the massive failure in the Atkinson case discussed on page 1 of this issue. Obviously the facts in this ruling involve a harmless departure from the trust instrument (if indeed this questionable amendment is a departure at all)compared with the complete breakdown in Atkinson. But this may be an interesting insight into how the IRS views such issues.

Perhaps the forthcoming revision of the Internal Revenue Service sample CRT forms (reported in the last issue of CGP News) will help clarify what is required, permitted, and forbidden in this area.    


Bequest to Rebuild Foreign Mosque Is Deductible


LR 200024016. The decedent (let’s call him D), a US citizen, provided a bequest in his will for the rebuilding of a mosque in his home town in a foreign country under the supervision of his nephew. The mosque was built by D’s great-grandfather in 1910, and is in such a deteriorated condition that it will have to be demolished and rebuilt. With the approval of the probate court, D’s executor created a charitable trust to receive this bequest. [Why? The parties represented that this was done to comply with Louisiana law, to eliminate exposure to construction liability, and to maximize the funds available.] The sole purpose of the trust is to reconstruct the Mosque and thereby support its religious, educational, medical and social purposes. The decedent’s nephew, an engineer in the country where the Mosque is located, will serve as trustee of the trust. On the termination of the trust, all its remaining assets (other than those relating to the Mosque) will be distributed to a section 501(c)(3) organization supportive of the Moslem religion. The IRS has recognized the exemption of the trust under section 501(c)(3).

On this basis, the Internal Revenue Service held that D’s estate will be entitled to an estate tax charitable deduction upon distributing the bequest to the trust.

            The foreign nature of the Mosque project does not jeopardize the estate tax charitable deduction, as demonstrated by a number of cases and rulings. Unlike the income tax charitable deduction provision, which limits deductions to domestic organizations, the estate tax charitable deduction is not so limited. What is novel here is the manner in which D’s estate carried out the bequest in support of this mosque reconstruction project. By forming a separate trust and qualifying it as a section 501(c)(3) organization in its own right, the estate was able to assure the deduction and carry out the literal terms of D’s bequest for rebuilding the Mosque under the supervision of D’s nephew. Planners might bear this approach in mind and consider a limited-life, special purpose charitable organization for comparable situations. 





Now it’s official! Topic A for periodicals in recent weeks has been the new wave of philanthropic undertakings by young, dot com entrepreneurs. The July 24, 2000, issue of Time Magazine featured a cover emblazoned with “The New Philanthropists:  They’re hands on. They want results. Who gives, and how much.” Inside, the following stories appear:


            “A New Way of Giving,” by Karl Taro Greenfield.


            “Giving Billions Isn’t Easy,” also by Karl Taro Greenfield.


            “Venture Philanthropists,” by Karl Taro Greenfield and David S. Jackson.


            “He Gives Best by Investing,” an unsigned story about the philanthropic interests of Larry Ellison, founder of the Oracle software company and described here as “the richest man in the world,” at least at the time the article appeared.


            “The Gift of Literacy,” by Anamarie Wilson.


            Plus several sidebar features describing individual giving profiles of new technology millionaires and others.


“New Opportunities, New Limitations in Planning With Charitable Remainder Trusts,” by Terry L. Simmons, William R. Murieko, and Eric G. Reis, Probate & Property (May/June 2000) at p. 41.





Trustee Duties Under the Prudent Investor Rule


By Thomas W. Cullinan, J.D., Omaha, Nebraska


            Our guest editor this month is Tom Cullinan of Omaha, Nebraska. Tom holds degrees in business and law and has 15 years of professional experience in institutional financial services and planned giving program management. His volunteer work includes the advisory board of the National Planned Giving Institute at The College of William and Mary and board of Charitable Accord. We express our appreciation to Tom for contributing this important article to CGPNews.


This article is a review of the obligations of trusteeship and a general outline of the Prudent Investor Rule as it affects charitable trusts. It seeks to remind us about the fiduciary duties and potential liabilities facing the trustee of a charitable trust, and also highlights questions for any such trustee (including a charitable organization that chooses to serve as trustee), the board member of a not-for-profit institution, and the gift planning practitioner. Some readers may find this discussion relates to stewardship issues, other types of life income gifts, and current business practices for both commercial trustees and not-for-profit trustees.


Background of Trust Administration and Investment of Trust Funds


            The origins of trust investment law were derived 170 years ago (then 21-year-old Abraham Lincoln was clearing and fencing his father’s farmland in Illinois) in the written opinion for the case of Harvard College v. Amory that defined the “prudent man rule.” Trustees in general would be held “to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering their probable income, as well as the probable safety of the capital to be invested.”

            Over intervening years — as cases with various fact patterns and interpretations have been tried, analyzed, and offered as precedent — the generality of the rule became encumbered and less adaptable. In many jurisdictions the rule morphed into “legal lists” of the investments the prudent man could hold until the Restatement, Second, of Trusts § 227 (1959) provided less restrictive guidance. Ever narrowing standards over the next 30 years, again derived by case law interpretations, led to the dual problem of unrealistic standards and the increased probability that even the exercise of care, skill, and caution by a trustee might not be defensible.

The evolution of modern investment practices and portfolio theory during the decades of the late 20th century caused broad revisions in trust investment management. Due to these changes it became necessary to define operational parameters that any trustee might apply with confidence that would satisfy his or her fiduciary responsibilities. So it is that the Prudent Investor Rule was revised again to permit a trustee to follow generally agreed theories and principles in the administration and investment of trust funds.


The Standards


            Following are the fundamental, current requirements of the Prudent Investor Rule for both a private trustee and trustee of a charitable trust.


§ 227. General Standard of Prudent Investment


            The trustee is under a duty to the beneficiaries to invest and manage the funds of the trust as a prudent investor would, in light of the purposes, terms, distribution requirements, and other circumstances of the trust.


(a)  This standard requires the exercise of reasonable care, skill, and caution, and is to be applied to investments not in isolation but in the context of the trust portfolio and as a part of the overall investment strategy, which should incorporate risk and return objectives reasonably suitable to the trust.


(b) In making and implementing investment decisions, the trustee has a duty to diversify the investments of the trust unless, under the circumstances, it is prudent not to do so.


(c)  In addition, the trustee must:


(1) conform to fundamental fiduciary duties of loyalty (§ 170) and impartiality (§ 183);


(2) act with prudence in deciding whether and how to delegate authority and in the selection and supervision of agents (§ 171); and


(3) incur only costs that are reasonable in amount and appropriate to the investment responsibilities of the trusteeship (§ 188).


(d) The trustee’s duties under this Section are subject to the rule of § 228, dealing primarily with contrary investment provisions of a trust or statute.


§ 389. Investments of Charitable Trusts


            In making decisions and taking actions with respect to the investment of trust funds, the trustee of a charitable trust is under a duty similar to that of the trustee of a private trust.

            Not only has the Prudent Investor Rule become the law in most states, it has also been broadly adapted to other public funds, pension reserves, and other assets. However, the commentary following these two Restatement sections cautions trustees and practitioners that statute and/or case law in some jurisdictions restrict the trustee’s investment authority. In addition, it is important to note that the general standard can be modified if the terms of the trust contain a provision to the contrary, or if an opposing statutory provision (or judicial interpretation of an applicable statute) exists.

            The Prudent Investor Rule in Section 228, which governs investment by trustees, clearly requires the trustee to conform with conflicting statutory provisions. That section further states that while holding the trust powers granted by virtue of the trust, the trustee has a duty to all beneficiaries to conform to the terms of the trust when directing or restricting investments by the trustee. Comment b on the basic duties of the Prudent Investor states that the terms of the trust may be “ . . . express and implied, may be derived from written or spoken words, circumstances surrounding the establishment of the trust, and sometimes statutory language that is automatically imported into trusts or by which some trusts are established.”

            Additionally, the trustee must adhere to basic fiduciary standards relating to making, monitoring, and reviewing investments. Though the trustee is not held to guarantee investment performance, when things go wrong a breach of trust can be found by examining the prudence of a trustee’s conduct.


Selected Duties of the Trustee


Loyalty. Each trustee is bound to administer the trust in a manner that is only in the interest of the beneficiaries. Generally, the trustee may neither compete with nor profit at the expense of a beneficiary. It follows that, absent terms of the trust permitting such actions (though never in bad faith), a trustee may not sell trust property to himself individually (or vice versa) or have a personal interest in a transaction that may affect his judgement.


In the case of a corporate trustee, the sale of trust property to an officer, director, or one of its departments is a clear violation of fiduciary duty.


It is improper to invest trust assets in the trustee’s business, and it is improper for the trustee to borrow money or lease property held in the trust.


The trustee’s duties run to the beneficiaries only and not to the benefit of a third party or for interests outside of the purposes of the trust.


Impartiality. Whether their interests are concurrent or successive, according to the Restatement comment, a trustee must deal fairly and impartially whenever there are two or more beneficiaries of the trust. Though the trust language may grant discretion in favoring a beneficiary, the court can prevent abuse of that discretion.


Unless the trust directs otherwise, a trustee has a duty to invest in a manner that will provide reasonable total return and protect the value of its property.


The safety of capital concept includes preventing the erosion of purchasing power due to inflation.


When there are two or more life beneficiaries the trustee has the duty to consider the individual tax circumstances of each while maintaining fidelity to the principal.


Delegation. Despite the duty that a trustee must personally administer the trust, the trustee may delegate one or more of the responsibilities of trusteeship when it is prudent to do so. Having the discretion to delegate also means that there can be an imprudent decision to delegate and an imprudent failure to delegate. Further, whether the trustee exercised care, skill and caution in the process of delegation turns on agent compensation, terms and length of the arrangement, and how agents were monitored and supervised.


A trustee’s delegation of responsibilities is a matter of fiduciary discretion.


Unless permitted by the terms of the trust, a trustee may not permanently transfer the entire administration of a trust to another person, co-trustee, or agent.


A person named trustee may disclaim the appointment, but once he or she accepts the trusteeship may not resign or transfer trust property to a substitute trustee unless by court order or under the terms of the trust.


The trustee may seek and accept advice from others (notably accountants, attorneys, and financial specialists) provided that such advice involves reasonable expense that is necessary and appropriate.


Stewardship is a general duty of the trustee, as beneficiaries are entitled to be furnished information about the trust and to be consulted by the trustee on an impartial basis regarding administrative matters and the beneficiary’s preferences and circumstances.

When professional investment advice is required, the trustee must at minimum establish the investment objectives and direct the investment strategy.


            Productivity. Trustees must manage trust property in a productive manner consistent with the fiduciary duties of caution and impartiality. The objective is total return and a balancing of the competing interests of income and principal consistent with the purposes, requirements, and circumstances of the trust. It is recognized that attaining income and corpus goals (especially the latter) is uncertain in any given period of time.


If land is in the trust the trustee is to manage the trust assets in a way that will produce trust accounting income (though this is done with regard to returns generated by the entire trust and not any particular asset).


When the trustee is to transfer possession of real estate to a beneficiary the trustee’s duty may be directed less toward productivity in favor of preserving the property.


A trustee’s duty with regard to tangible personal property is to sell or lease the assets unless suitable for investment.


A trustee will likely be liable for a failure to invest cash held for an unreasonably long time, though a reasonable balance in a checking account to secure appropriate banking services may itself be considered sufficient return.


When wasting assets are in the trust the trustee owes a duty to the principal beneficiary to either sell the depleting assets or use accounting or other practices that protect the corpus.


Selected Trustee Liabilities


            Breach of trust. A trustee committing a breach of trust will be accountable for profit to the trust that did not accrue to the trust due to the breach, and must restore the values to the trust estate and distributions to the levels that would have existed had there been no breach. The beneficiaries may affirm a transaction resulting in a breach of trust, essentially accepting the trustee’s improper conduct. In this event the trustee is obligated to compensate the trust for a loss (which is defined to include a failure to realize income, capital gain, or appreciation that would have resulted from proper administration).


The trustee is not liable for losses that occur when the trustee exercises reasonable care and skill and does not commit a breach of trust.


A trustee who commits a breach of trust is not subsequently relieved of the duty to properly administer the trust.


Removal from office and denial of fees are among the court’s remedies for misconduct.


            Loyalty. If a trustee sells trust property to himself at a favorable price, a beneficiary has three remedies. He can force the trustee to pay the difference to the trust, or cancel the sale with a transfer back to the trust along with any lost income, or resell and pay any excess amount over to the trust. If a trustee sells his trust property to the trust at an above-market price, a beneficiary can force the trustee to repay the difference, or cancel the purchase and repay the price. If the property sold loses value, the trustee may be charged for the loss, and if the property increases in value the trustee is chargeable for any profit from the transaction.


When a trustee violates a duty to a beneficiary and is compensated by a third party (including commissions or bonus) for actions done related to the administration of the trust, that trustee is accountable for the amounts paid as compensation.


Unless authorized by the trust terms, a bank or corporate trustee purchasing its own stock for the trust commits an improper purchase (even if the purchase of shares issued by a similar institution would be a suitable investment, or if the shares are purchased from a third party).


            Improper investments. When the trustee fails in his duty not to purchase certain property the beneficiaries may elect to reject or affirm the purchase. When they reject the purchase the trustee replaces the purchase price, plus an adjustment for a reasonable total return for appropriately invested assets. Until the trustee has restored the value to the trust, the beneficiaries’ claim is secured by a lien against the property purchased improperly.


When a trustee fails to make a proper investment within a reasonable time, the beneficiaries are, as much as possible, to be restored to the position they would have enjoyed if the trustee had not committed the breach.


If the trustee is in breach of trust due to a failure to invest a specified sum in designated securities, the beneficiaries can compel the purchase and force the trustee to make up any increased purchase price and make good on any lost income from the trustee’s own resources.


Duties Regarding Charitable Trusts


            Though the duties of the trustee of a charitable trust are substantially the same as those for a private trust, they are generally enforceable by the Attorney General. Where the management of a charitable trust involves multiple trustees, a majority of the trustees may act unless the terms of the trust specify otherwise.

            Comment a to Section 389 sets out the general investment duties for the trustee. “The charitable trustee has a “duty to the beneficiaries to invest the funds of the trust as a prudent investor would, in light of the purposes, terms, obligations, and other circumstances of the trust,” absent contrary statute or trust provision. “This standard requires the exercise of reasonable care, skill, and caution, and is to be applied to investments not in isolation but in the context of the trust portfolio and as part of an overall investment strategy . . . . Thus, in deciding whether to purchase, retain, or dispose of investments and in implementing investment decisions, the trustee has the authority and is subject to the standards provided by the prudent investor rule.”

            Further, funds invested by charitable corporations for general purposes are also subject to the prudent investor rule.


Charities Serving as Trustee


            The decision by a not-for-profit organization to serve as trustee of a charitable trust is critical on several levels. Viewed by the prospective donor it may be seen as an accommodation or facilitation of an important gift. The charity’s board and executives will see the potential for increased liability (if things go wrong) and the potential for increased giving (if things go right).

            Gifts made to charitable organizations are, by definition and common law practice, gifts “in trust” because the assets must be used in furtherance of the charitable purposes. Donors frequently make their gifts to charity restricted to specific purposes, or through trusts administered by the charity in perpetuity (as with endowments) to fulfill the donor’s charitable intent. Many charities elect to serve as trustee in split interest trusts provided that service furthers its charitable purposes (such as building capital and/or endowment).

            Charities that serve as trustee do not make a profit through that service. Typically, they reimburse themselves for the costs incurred in administering those trusts and these costs may be lower than the fees charged by commercial trustees. They perform these duties primarily to maintain a close relationship to their donors, and they understand that the obligations of trusteeship to support loyalty and good stewardship. It is also common for charities to administer trusts that are smaller (and therefore considered unprofitable) than those administered by commercial trustees.

            For some individual trustees, one might guess that good investment performance has covered fiduciary mistakes. Broad investment gains in recent years have led to high expectations among donors and income beneficiaries, yet extending this era of unbroken double-digit returns year after year is historically improbable.  It is also possible that improper administrative or investment practices in the management of charitable trusts may not withstand challenge if stock and bond investments delivered flat or negative total returns for a year or more. Charitable trustees need to be prepared to respond to their beneficiaries and donors when that time comes.


Context and Conclusions


While the gift planning practitioner and trustee may rely on the Prudent Investor Rule as legal authority (the Restatement of the Law Third was adopted in whole or in part during the 1990s in most states) it was also specifically promulgated to be a guide. Readers of this article are, as always, strongly encouraged to seek the advice of a professional qualified in the specialized field of charitable gift and estate planning. Overlapping statutes relating to charitable organizations (such as not-for-profit corporation statutes, the Uniform Management of Institutional Funds Act, the Uniform Principal and Income Act, Federal Reserve Board regulations, federal private foundation laws, and other provisions especially in those states that have not adopted the Prudent Investor Rule) require analysis beyond the scope of this article.

Though we live today in what some term a litigious society, a discussion of case law relating to these issues is also beyond the scope of this article. In fact, as stated in the Foreword of the Rest. 3rd, Trusts (Prudent Investor Rule), the Director of the American Law Institute suggests that case law requires separate consideration. “It is to be recognized that trust law is most often applied in daily trust practice, as distinct from litigation concerning trust administration,” he wrote, though the Restatement itself includes citations for over 130 cases.

            Before assuming important fiduciary responsibilities that accompany serving as trustee — the highest standards imposed by law — the board and executives of any not-for-profit organization needs to carefully examine the risks and rewards of that decision. The Prudent Investor Rule gives legal authority to assess investment and administrative tasks, engage experts, and even delegate responsibilities when appropriate to properly manage its duties under the trust.





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