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In previous posts, I have discussed various types of charitable trusts. While the rules governing charitable trusts can be quite complex, charitable trusts are simply trusts set up for charitable purposes.
The reasons for setting up charitable trusts are numerous. Obviously, the noblest reason to set up a charitable trust is to promote charitable activities. There are, however, a variety of other reasons for setting up such trusts, most of which relate to tax issues—thus the complexity of the rules surrounding their use.
Requirements of Charitable Trusts
To qualify as a charitable trust, a trust must exist for a charitable purpose, meaning that it must confer a substantial benefit to society. Trusts that exist to promote education, religion, health, relief of poverty, or governmental purposes generally qualify.
In addition, the trust must exist for the benefit of a reasonably large number of unidentifiable members of the public at large. They generally cannot be set up for the purpose of benefitting specifically identifiable individuals. The breadth of the gift often determines whether beneficiaries are individually identifiable. So, for example, a trust to benefit “the poor of Benton County” would likely qualify, while a trust to benefit “my poor relatives” would not. It is important to recognize that merely calling a trust a charitable trust does not make it so.
The Rule Against Perpetuities
The Rule Against Perpetuities is a complex rule originating at common law that limits the length that a trust may exist. The idea of the Rule Against Perpetuities is that an individual should not be able to control property indefinitely after death. The rule states, “No interest is good unless it must vest, if at all, not later than twenty-one years after the death of some life in being at the creation of the interest.”
The rule is exceedingly difficult to decipher and apply to individual circumstances, even for attorneys. In fact, when I was studying for the bar exam, the instructor of the bar review course simply said, “Most people don’t understand this rule, so if you don’t, don’t worry about it.” Cornell University’s website states it well: “Because the meaning of this rule is virtually impossible to decipher, many states have modified it, and some have abolished it altogether.”
Nevertheless, when setting up trusts, a basic understanding of the Rule Against Perpetuities is necessary because it is important to understand that trusts cannot simply last forever. Even those states that have modified or abolished the Rule Against Perpetuities have generally replaced it with a simpler rule that accomplishes a similar result, such as limiting the length that a trust may exist to 90 years.
Charitable trusts, however, are unique in this regard. Charitable trusts are not subject to the Rule Against Perpetuities and can thus exist forever.
Sometimes the purposes of a charitable trust can no longer be accomplished. Since charitable trusts can exist in perpetuity, the impossibility of performance may not occur until a very long time after the founders of the trusts have died.
For example, a charitable trust set up to provide scholarships for students at Smith University would become difficult to fulfill if Smith University later dissolved. The question then becomes, how should the trust’s funds be utilized?
This is where the legal doctrine of cy pres comes into play. When the stated charitable purposes of the trust can no longer be accomplished, it may be reformed through judicial proceedings under this doctrine.
Under cy pres, a court will change the purposes of the trust in an effort to keep the trust going in a manner as near to the intentions of the settlor of the trust as possible. In order to apply, the proposed change must be consistent with the underlying intent of the settlor.
It is important to note, however, that this doctrine can only be used to modify valid trusts. It cannot be used to reform a trust that was never a valid charitable trust in the first place.