Charitable Giving & Related Legal Issues
Charitable donations have the dual purpose of saving taxes and supporting valued causes. For individuals with substantial estates, this could mean hundreds of thousands of dollars in tax savings. Charitable trusts are an ideal way to accomplish this goal. The rationale for the different treatment of charitable trusts is that society wants to encourage charitable giving.
Typically, the same rules that apply to formation and governance of a private trust apply to charitable trusts. The primary differences include that charitable trusts must benefit a charitable purpose, that a charitable trust is exempt from the rule against perpetuities and is therefore easily modified, and that the state attorney, rather than ascertainable beneficiaries, is the primary party with standing to enforce a charitable trust.
Suitable charitable purposes include objectives like the relief of poverty, the advancement of education, or any other purpose sufficiently beneficial to the community to justify the trust’s preferential treatment. A trust to promote a political party’s success is not a valid charitable purpose. However, a trust for the improvement of the structure and methods of government, in a manner advocated by a particular political party, is charitable. A trust to bring about a change in the law may be considered a valid charitable purpose, provided the purpose is not to bring about those changes by illegal means. In short, the scope of a charitable trust is construed relatively broadly.
A charitable trust may be valid even if the people who directly benefit are limited in number. However, a trust to educate a particular person or named persons does not qualify, nor does a trust to educate the settlor’s descendants, although scholarship trusts have been found to constitute valid charitable trusts even if the settlor’s family is given preferential treatment. The settlor is also permitted to delegate the selection of the charitable purpose to the trustee.
The rule against perpetuities is typically rationalized by a desire to limit settlors in what they can control from the grave. However, there is less concern for this with charitable trusts due to the Cy Pres doctrine. Cy Pres dictates that if the settlor’s named charitable purpose becomes illegal, impossible, wasteful, or impracticable, the court may direct the application of the trust property to another charitable purpose that approximates the settlor’s intention. In order for Cy Pres to apply, the court must determine that the settlor had some general charitable purpose, such as for the benefit of elementary education, rather than a narrow purpose, such as exclusively wanting to benefit a particular charity. The rationale for the Cy Pres doctrine is that society wants to ensure that charitable trusts serve charitable purposes.
The settlor should make sure to use the exact legal name of the charity to avoid confusion and determine whether the charity is tax-exempt for federal estate tax purposes. The terms “benevolent” and “philanthropic” should be avoided because they have been found to be broader than “charitable.” An individual should hire an experienced estate lawyer to ensure his or her charitable trust is properly drafted.
