Trustee Duties for Charitable Trusts: Legal Obligations and Potential Pitfalls
When it comes to estate planning, charitable trusts play a vital role in allowing individuals to support causes they care about while potentially obtaining tax benefits. Trustees who oversee charitable trusts must fully understand their duties to make sure the trust’s purpose is fulfilled and to avoid common pitfalls that can jeopardize the trust’s validity and effectiveness.
At Heartland Estate Law, LLC, in Overland Park, Kansas, we assist clients in establishing charitable trusts and advise trustees on their duties. Here, we’ll outline these duties, as well as the legal responsibilities held by trustees of charitable trusts and the potential pitfalls that can arise in managing these unique estate planning tools.
What Is a Charitable Trust?
A charitable trust is a legal arrangement established to hold and manage assets for charitable purposes. Unlike a private trust that benefits specific individuals or families, a charitable trust benefits the public or a large segment of the community. Common charitable purposes include supporting educational institutions, religious organizations, scientific research, and more.
Charitable trusts may be created during a settlor’s lifetime (inter vivos trust) or through a will (testamentary trust). In either case, the trustee is responsible for administering the trust in accordance with the settlor’s instructions and the law. A trustee must understand what is required of them in order to carry out their duties correctly.
What Is Required of a Trustee in a Charitable Trust?
The trustee acts as the legal fiduciary of the charitable trust, charged with managing trust property, making distributions to charitable beneficiaries, and staying compliant with applicable laws. Trustees have a duty to act prudently and in good faith to protect and grow the trust’s assets while carrying out the charitable purpose effectively.
Legal Obligations of Trustees for Charitable Trusts
The legal obligations of trustees managing charitable trusts arise from state trust laws, the terms of the trust instrument, and federal and state tax regulations. Understanding these is essential. Working with an estate planning attorney, such as those at Heartland Estate Law, LLC, can be helpful. Below are the primary duties that trustees must fulfill:
Duty of Loyalty
The duty of loyalty requires trustees to administer the charitable trust solely in the interest of the charitable beneficiaries and the trust’s purpose. Trustees must avoid conflicts of interest and can’t use trust assets for personal gain. This duty protects the integrity of the charitable trust and makes sure that the assets are devoted exclusively to charitable activities.
Duty of Prudence
Trustees must manage the charitable trust’s assets prudently, acting with the care, skill, and caution that a reasonable person would exercise. This includes making sound investment decisions and monitoring trust income and expenses. Many states adopt the Uniform Prudent Investor Act (UPIA), which provides guidance on investment practices for trustees.
Duty to Administer According to the Terms of the Trust
Trustees are legally bound to follow the instructions laid out in the trust document. This means making distributions only for authorized charitable purposes and adhering to any limitations or conditions the settlor imposed. Failure to honor the terms of the trust can lead to legal challenges and possible removal of the trustee.
Duty to Comply with Legal Requirements
Charitable trusts are subject to numerous state and federal laws. Trustees must comply with a wide range of legal and regulatory requirements to allow for proper administration and maintain the trust’s charitable status. These rules are designed to promote transparency, accountability, and fidelity to the trust’s philanthropic purpose. Trustees must comply with:
State trust codes and charitable trust statutes
State attorney general oversight, who often has the authority to monitor charitable trusts to prevent abuse
IRS rules governing tax-exempt organizations and charitable deductions, including filing Form 990 (Return of Organization Exempt From Income Tax), where applicable
Rules on self-dealing, excess benefit transactions, and private inurement under the Internal Revenue Code
Noncompliance can result in penalties, loss of tax-exempt status, or legal action by the state attorney general. Even well-meaning trustees can face liability if they inadvertently violate these complicated rules. Proactively seeking legal guidance and staying informed about regulatory updates can help trustees avoid these costly missteps.
Duty to Keep Proper Records and Provide Reporting
Trustees must maintain detailed records of trust assets, transactions, income, and distributions. Transparency is critical for accountability and may be required by law. Many charitable trusts are also required to file annual reports with state regulators and provide reports to beneficiaries or other interested parties.
Common Trustee Responsibilities in Managing Charitable Trusts
In addition to the overarching duties, trustees perform several ongoing practical tasks. These day-to-day responsibilities are critical to making sure the charitable trust remains compliant, effective, and aligned with the donor’s original intent. Trustees must be diligent, organized, and proactive in addressing these functions to avoid administrative lapses or regulatory scrutiny.
Asset Management and Investment
Trustees must prudently invest and manage the trust assets to preserve their value and produce income for charitable purposes. This often involves working with financial advisors and reviewing investment strategies regularly. Trustees must also make sure that the investments align with the risk tolerance and income needs set forth in the trust.
Distribution of Income and Principal
Trustees must distribute trust income to qualified charities according to the trust document. Some charitable trusts require trustees to maintain the principal intact (remainder trusts), while others allow principal distributions under certain circumstances. Trustees must also document all distributions thoroughly to allow for transparency and regulatory compliance.
Monitoring the Charity’s Use of Funds
When the trust benefits a specific charitable organization, trustees may have an obligation to monitor how the funds are used to allow for alignment with the trust’s purpose. Trustees should take reasonable steps to confirm that the charity remains in good standing and is using the funds effectively. Failure to conduct proper oversight could result in the misuse of trust assets.
Tax Compliance and Filings
Trustees must file necessary tax returns and make sure the charitable trust maintains its tax-exempt status. This includes timely filing with the IRS and relevant state agencies. Trustees should also be aware of any required disclosures or informational returns, such as Form 990 or state charity registrations.
Potential Pitfalls for Trustees of Charitable Trusts
Trustees must be aware of common pitfalls that can jeopardize the charitable trust or result in personal liability. Even well-intentioned missteps can have serious financial and legal consequences. Understanding these risks in advance allows trustees to take preventative steps and protect both the trust and their personal interests.
Conflicts of Interest and Self-Dealing
A significant risk is engaging in transactions where the trustee personally benefits at the expense of the trust. The IRS strictly prohibits self-dealing between a charitable trust and its trustees, officers, or family members. Even unintentional self-dealing can cause excise taxes and invalidate distributions.
Failure to Follow the Trust Terms
Ignoring or misinterpreting the trust document can lead to improper distributions or investments. This may cause the trust to fail in achieving its charitable purpose or expose trustees to legal challenges. Trustees must read and understand the trust terms thoroughly and seek clarification from legal counsel when needed.
Poor Investment Decisions
Negligent or reckless investment strategies can deplete trust assets, reducing funds available for charity. Trustees must maintain a diversified portfolio and avoid speculative investments that contradict the duty of prudence. Failure to regularly review and adjust investment strategies in response to market conditions can also result in missed opportunities or increased risk.
Lack of Proper Documentation and Reporting
Failing to keep accurate records and file required reports can trigger investigations and penalties. Trustees should maintain comprehensive documentation of all decisions and transactions. This includes records of meetings, correspondence with beneficiaries, and financial statements.
Ignoring State Attorney General Oversight
Many states empower the attorney general to oversee charitable trusts. Trustees who disregard this oversight risk legal action or removal. In some jurisdictions, trustees must submit annual reports or financial statements to the attorney general’s office. Maintaining open communication and cooperation with state regulators is a key part of compliant trust administration.
Not Seeking Professional Guidance
Because of the intricacy of charitable trust law and tax rules, trustees who attempt to manage trusts without legal or financial advice increase the risk of errors. Engaging experienced estate planning attorneys, accountants, or financial advisors can provide the support trustees need to carry out their responsibilities effectively.
Speak With an Experienced Estate Law Attorney Today
Serving as a trustee for a charitable trust is a rewarding but demanding role that carries substantial legal responsibilities. Understanding the legal duties and common pitfalls associated with charitable trusts is essential for trustees and estate planning professionals alike.
At Heartland Estate Law, LLC, in Overland Park, Kansas, we help trustees for charitable trusts understand and carry out their duties. Contact our firm today to speak with one of our attorneys.