TRUSTS & ESTATES (CHARITABLE TRUSTS)

Trusts & Estates (Charitable Trusts)

In New York, Article 8, entitled "Charitable Trusts" of the New York Consolidated Laws, Estates, Powers and Trusts Law – (EPT) and Article 7-A, entitled "Solicitation and Collection of Funds for Charitable Purposes" of the New York Consolidated Laws, Executive Law – (EXC) govern charitable trusts.

EPT Section 8-1.1 characterizes the possible attributes of a charitable trust as being for "religious, charitable, educational or benevolent purposes".

Article 7-A of the New York Consolidated Law, Executive Law – (EXC) characterizes "charitable organizations" as "benevolent, philanthropic, patriotic, or eleemosynary..." (meaning charitable) "...or purporting to be such or law enforcement support organization".

A charitable trust is a fiduciary entity that differs from a charitable corporation in that the trustees of a charitable trust (unlike a private trust, but similar to a charitable company) may hold and administer assets on behalf of charitable beneficiaries or expend such assets for charitable purposes without naming any specified beneficiaries, and the agreement creating a charitable trust must state explicitly that the trust is established, and will operate exclusively, for charitable purposes.

There are many types of charitable trusts, such as charitable lead trusts (requiring the payment of an annual annuity amount or a unitrust amount – generally meaning an amount equal to a fixed percentage of not less than 3% or more than 5% percent per year of the net fair market value of the trust's assets, valued at least annually – to charity and at the end of the trust term, which is based either on a specific term of years or a measuring life-in-being – meaning a person whose life span determines the duration of a life tenant's entitlement to the trust property – the amount remaining in the trust is distributed to any one or more charitable or non-charitable persons or organizations chosen by the trust settlor), charitable split interest trusts (combining private trusts with contributions to charities), and charitable remainder trusts (which provide for the distribution of an annual annuity or unitrust amount each year to one or more persons for a term of years based on a fixed number of years or measuring lives, and at the end of such term, the assets remaining in the trust are distributed to charity).

Creating a charitable trust generally requires choosing trustees, drafting a trust deed that includes specific language indicating that such charitable trust is intended to act only for purposes that are charitable under the New York laws regarding charitable trusts (such as noted above from EPT and EXC Article 7-A) and that such charitable trust will operate as an Internal Revenue Service (IRS) Section 501(c)(3) tax-exempt entity (if that is the intent of the trust settlors) so on dissolutionthe trust assets will be distributed in accordance with Section 501(c)(3), then filing with the IRS for such tax-exempt status using IRS Form 1023 and registering with the New York Charities Bureau (NYCB).

New York charitable trusts are subject to the regulatory requirements and oversight of the IRS, the New York Attorney General, the New York State Department of Taxation and Finance, the NYCB, relating to any possible taxes (such as corporate franchise, excise, income, local, sales, use) and tax exemptions.

EPT Section 8-1.4, entitled "" contains extensive information about the responsibilities and reporting requirements of trustees.

In particular, the trustee of a New York charitable trust has extensive guidelines – such as the New York Prudent Investor Act (NYPIA), the New York Prudent Management of Institutional Funds Act (NYPMIFA) and the Uniform Principal and Income Act (UPIA) – about the fiduciary obligations and standards to follow when investing trust assets.

The prudent investor rule in the NYPIA indicates that when making investment decisions, the trustee must consider the trust portfolio as an entirety, rather than concentrating on investments in particular sectors, and should consider such factors as: the existing general economic conditions; the expected tax consequences of investment decisions or strategies and of distributions of principal or income to the beneficiaries; the expected total return of the portfolio from both income and appreciation of capital; the liquidity and distribution requirements of the trust deed; the nature and expected duration of the trust or estate; the possible effect of inflation or deflation; the role that each investment plays in creating value for the overall portfolio; the size of the portfolio; and, the present and future distribution needs of the beneficiaries for distributions, to the extent reasonably known to the trustee.

The prudent investor rule establishes a strong presumption in favor of diversification of investments, in order to cushion any potential losses in any particular segment of the economy.

The prudent investor rule permits a trustee to delegate discretionary investment authority to an investment advisor, although when doing so, the trustee must exercise suitable care, skill and caution when selecting a suitable advisor, taking into consideration the particular delegated functions, the nature and value of the assets involved, and the advisor’s expertise, by clearly establishing the scope and terms of the delegation consistent with the purposes of the trust deed and then periodically reviewing the advisor’s exercise of the particular delegated functions and compliance with the terms of such delegation, and importantly, controlling the overall cost of the delegation, since under New York law, both the investment advisor and the trustee will be held jointly and severally liable for breach of fiduciary duty, in the event that either acts negligently.

EPT Section 11-2.3(b)(5) requires a trustee with special investment expertise to exercise such skills with a higher standard of care than a trustee with no investment experience, and provides that such trustee's performance will be judged at such higher standard.

EPT Section 11-2.3(b)(5) also allows a trustee some room for accounting innovation, to allocate traditional accounting income (such as dividends and interest) to principal, and conversely, to allocate capital appreciation, which traditionally would be treated as principal, to income to enable the trustee to make appropriate present and future distributions.

NYPIA in general, as well as EPT Section 11-2.4, authorize the trustee to elect to treat a trust as a unitrust, relieving him of the obligation to determine what amount should be allocated to principal or income, if the trustee determines that such an adjustment would be fair and reasonable to all of the beneficiaries under the circumstances, and the Surrogate's Court has the authority to review the trustee's decisions.

Under Section 2309 of the New York Surrogate’s Court Procedure Act (SCPA), trustee compensation is limited to 6% of the income and none of the principal of the trust, which is less than the compensation allowed for directors of a not-for-profit corporation.

Last updated 201008_1956