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Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 1 Charitable Trusts: Traps for the Unwary Presented by Richard S. Caputo, Esq.

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Presentation on theme: "Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 1 Charitable Trusts: Traps for the Unwary Presented by Richard S. Caputo, Esq."— Presentation transcript:

1 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 1 Charitable Trusts: Traps for the Unwary Presented by Richard S. Caputo, Esq.

2 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 2 Case Study #1 Will I, John Doe, of Reading, Berks County, Pennsylvania, declare this to be my last will and testament, hereby declaring void any will previously made by me. I hereby direct that all my debts and funeral expenses be paid. I give, devise and bequeath all my estate, real, personal and mixed, to the National Bank of Reading, to be held in trust. The Trust shall be known as the John Doe Loan Trust. The income derived from the Trust shall be used toward paying the college expenses of a white, American girl, who, together with her parents, must have been born in the United States of America. The father of said girl must have died previous to her receiving anything from the Trust. The said girl must be preparing for the vocation of teaching. If the income is more than sufficient to supply the needs of one girl, at the option of the Trustee, more than one girl may be aided. I desire that the Reading High School Alumni Association examine the qualifications of the girls making application for aid, and make such selections.

3 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 3 Will (con’t) All financial assistance provided by the Trust shall be considered loans, and the recipients of this financial help shall be expected to re-pay the loan(s) in five yearly payments or sooner if able, after graduating from college. The amount returned then shall be used in helping some other girl. My Trustee shall invest and reinvest the funds of my estate or of any trust in property of any kind, real, personal and mixed, irrespective of any statute, case, rule or custom limiting the investment of estate or trust funds; but my Trustee shall not invest any of the corpus of the Trust in mutual funds. I hereby appoint the National Bank of Reading as my sole Executor. ____________________________________ JOHN DOE

4 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 4 Problems/Issues with the Will? Issues 1.Racial Restriction 2.National Origin Restriction 3.Gender Restriction 4.Deceased Parent Restriction 5.Selection Criteria 6.Successor to Alumni Association 7.Repayment Obligation 8.Teaching Requirement 9.Investment Restriction 10.Code Section 501(c)(3) And Other Recommended Provisions

5 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 5 How Should These Problems/Issues Be Resolved?  Non-judicial Settlement Agreement  File a Petition with Orphans’ Court

6 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 6 Racial/National Origin Restrictions  Ask the Court to remove the Racial and National Origin Restrictions  IRS requires that these provisions be removed as such provisions are against public policy

7 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 7 Gender Restriction  Ok for IRS purposes  However, if “selection committee” receives state or federal funding, then “selection committee” may decline to participate in the selection process  Could have a Code Section 4942 problem

8 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 8 Deceased Parent Restriction  Ok for IRS purposes  Could have a Code Section 4942 problem

9 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 9 Selection Criteria  Financial need  Academic merit  Ask the Court to provide the Trustee or the “selection committee” with the authority to establish selection criteria, determine the number of loans that shall be granted each year and determine the amount of each loan

10 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 10 Successor to Alumni Association  What if the Alumni Association no longer exists or refuses to participate in the selection of the recipients?

11 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 11 Repayment Obligation  Clarify Terms of the Loan Program  What if the recipient does not graduate from college? Is the loan repayable immediately?  How far must the Trustee go in order to collect the loans? Demand Letter? District Justice Complaint? Court of Common Pleas Complaint? Hearing? Execution?  Five years from when? Is there interest on the loan? Is the Trustee supposed to securitize each loan? What if the recipient does not prepare “for the vocation of teaching?”

12 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 12 Repayment Obligation (con’t)  Administratively burdensome: - Review applications - Prepare loan documentation and obtain required signatures - Perfect security interests - Monitor students for five years after their graduation - Institute legal action to collect loans  Solution: Convert the trust into a scholarship trust

13 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 13 Teaching Requirement  Is there a moral obligation or a legal requirement for the student to teach? If there is, then the scholarship may be taxable as compensation  Possible Solution: Require that the student major in education (may be too narrow) but remove the following reference: “preparing for the vocation of teaching”

14 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 14 Investment Restriction  Request the Court to remove the provisions prohibiting the Trustee from investing in mutual funds

15 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 15 Code Section 501(c)(3) And Other Recommended Provisions  Charitable Purpose Clause (Charitable Instruments Act)  Dissolution Clause (Charitable Instruments Act)  Private Foundation Provisions (Charitable Instruments Act)  Miscellaneous Provisions - Prohibition against inurement, political campaigning and substantial lobbying - Power to resign without Court approval - Power to amend without Court approval - Power to terminate the Trust without Court approval - Power to select alternate beneficiaries (qualified charitable beneficiaries)

16 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 16 Case Study #2 I, JOHN DOE, of Philadelphia, Philadelphia County, Pennsylvania, declare this to be my last will and testament, hereby declaring void any will previously made by me. I hereby direct that all my debts and funeral expenses be paid. I give, devise and bequeath all my estate, real, personal and mixed, to the National Bank of Philadelphia, to be held in trust. The income from the Trust shall be distributed as follows: 1. Twenty-Five Dollars ($25.00) each year to the Cemetery Company of Philadelphia, for the upkeep of the cemetery grounds. 2. Twenty-Five Dollars ($25.00) each year to the Church of Holy Spirit to be used to maintain the burial lot of my grandfather, Charlie Doe. 3. The remainder of the income, in quarterly payments, as follows: (a) One-third thereof to the RIGHT WORSHIPFUL GRAND LODGE OF THE MOST ANCIENT AND HONORABLE FRATERNITY OF FREE AND ACCEPTED MASONS OF PENNSYLVANIA, and Masonic Jurisdiction thereunto belonging, to be expended by its Committee on Masonic Homes for the care and comfort of patients in the Hospital of the Masonic Homes at Elizabethtown, Pennsylvania, who have become helpless or disabled by blindness, paralysis or other causes requiring special treatment and attention. Any income not required for these purposes may be used for the care and comfort of the other guests in said Homes.

17 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 17 Will (con’t) (b)One-third thereof to be used toward paying the college expenses of residents of Bourbon County, Kentucky who attend the University of Kentucky and who major in Accounting. (c)One-third thereof to crippled children of Bourbon County, Kentucky, as selected by the Bourbon County Medical Society. I, hereby, direct that the Trustee shall file an accounting for the Trust two years after the date of my death and every two years thereafter. I, hereby, direct that the Trustee shall be entitled to compensation from the Trust as follows: -Five percent (5%) of the gross accounting income of the Trust. I, hereby, direct that the Trustee shall only invest the Trust in shares of Coca-Cola. I hereby appoint the National Bank of Philadelphia as my sole Executor. _________________________________ JOHN DOE

18 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 18 Problems/Issues 1.Cemetery Provision #1 2.Cemetery Provision #2 3.Grant to Code Section 501(c)(8) Organization 4.Grant to Students 5.Grant to Crippled Children 6.Successor to Medical Society 7.Accounting Requirement 8.Compensation 9.Investment Restriction 10.Code Section 501(c)(3) And Other Recommended Provisions

19 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 19 Cemetery Provision #1  IRS requires that this provision be removed  However, this would be ok if a Code Section 501(c)(3) organization, like a church, owned the cemetery

20 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 20 Cemetery Provision #2  Church owns cemetery; on its face, this provision is ok  This is not a cemetery issue; this is a familial issue  This provisions confers a benefit on a Code Section 501(c)(3) organization  However, this provision also confers an impermissible private benefit on the testator’s family  IRS requires that this provision be removed

21 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 21 Grant to Code Section 501(c)(8) Organization  Request the Court to remove the requirement that the Trustee distribute the income directly to the Masonic Lodge, a Code Section 501(c)(8) organization, and instead, require the Trustee to distribute the income directly to the Masonic Homes, a Code Section 501(c)(3) organization  Distributing the income directly to the Masonic Homes will enable the Trust to qualify for a Code Section 501(c)(3) tax exemption and will minimize the Trust’s exposure to federal excise taxes

22 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 22 Grant to Students  Request that the Court allow the Trustee to make distributions directly to the University (rather than directly to the students)  Distributing the income directly to the University will enable the Trust to qualify for a Code Section 501(c)(3) tax exemption and will minimize the Trust’s exposure to federal excise taxes

23 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 23 Grant to Crippled Children  Confirm that the Trustee may make distributions directly to crippled children, as selected by the Medical Society, and request that the Court allow the Trustee, at its discretion, to make distributions directly to those individuals and organizations that provide medical care and treatment to such crippled children  Distributing the income directly to the crippled children or their medical providers will enable the Trust to qualify for a Code Section 501(c)(3) tax exemption and will minimize the Trust’s exposure to federal excise taxes

24 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 24 Successor to Medical Society  What if the Medical Society no longer exists or refuses to participate in the selection of the recipients?

25 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 25 Accounting Requirement  This requirement will provide an extra level of oversight  However, this requirement is costly

26 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 26 Compensation  Request the Court to increase the trustee’s fee  This will be difficult  However, the Court may be willing to compensate the trustee in accordance with its customary and ordinary fee schedule if the trustee can establish that its duties and obligations have increased considerably since the governing instrument was executed

27 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 27 Investment Restriction  Request the Court to remove the provisions requiring that the Trustee invest the corpus of the Trust only in Coca-Cola stock

28 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 28 Code Section 501(c)(3) And Other Recommended Provisions  Charitable Purpose Clause (Charitable Instruments Act)  Dissolution Clause (Charitable Instruments Act)  Private Foundation Provisions (Charitable Instruments Act)  Miscellaneous Provisions - Prohibition against inurement, political campaigning and substantial lobbying - Power to resign without Court approval - Power to amend without Court approval - Power to terminate the Trust without Court approval - Power to select alternate beneficiaries (qualified charitable beneficiaries)

29 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 29 Case Study #3 I, John Doe, of the Borough of Doylestown, County of Bucks, and Commonwealth of Pennsylvania, being of sound, disposing mind, memory and understanding, make, publish and declare the following as my last Will and Testament, herby revoking all Wills hereto. I give and devise certain property known as 747 Constitution Drive, Exton, PA and the buildings thereon to READING TRUST COMPANY, to hold in trust for the following charitable uses and purposes: To lease the garage and piece of land to go with it, free and clear of all the provisions of this trust regarding the use thereof, and also in the discretion of the Trustee at any time hereafter to sell and convey the garage and such piece of land with the garage as, the Trustee may deem appropriate, at public and private sale, free, clear and discharged of and from all trusts and restrictions under this Will, and to grant licenses and permissions, of leases with or without consideration or rentals therefore, from time to time or temporarily, or for terms of months or years, or at the pleasure of and subject to revocation by said Trustee and such licenses, permissions or leases to be granted and made to and only to persons, whether individuals or corporations desiring the use (or, in the case of corporations whose chartered objects are) for any public charitable, educational or welfare use, purpose and object, or for the general use, benefit or welfare of the public, or of the community of Doylestown.

30 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 30 Case Study #3, cont. My purpose in the creation of this trust being the gift, maintenance and operation of what my be termed a community property, for the general use, benefit and welfare of the community and of individuals and corporations serving, whether temporarily or otherwise, public, charitable, educational or community or welfare purpose without profits. I direct that said Trustee shall, at the expense of my estate, place in an appropriate position on the wall inside the building, an appropriate tablet of enduring material indicating that the community house and property are given in memory of Cole and Grace Doe.

31 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 31 Case Study #3, cont. I give and bequeath the sum of FORTY THOUSAND DOLLARS ($50,000.00) to READING TRUST COMPANY, in trust, nevertheless, as an Endowment Fund for the community property over which I have created the charitable trust provided for and to invest and keep said fund invested in good, safe securities.

32 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 32 Case Study #4 I, JOHN DOE, of the City of Philadelphia, State of Pennsylvania, being of sound and disposing mind, memory and understanding, do make, publish and declare this as and for my last Will and Testament, hereby revoking all other Wills by me at any time heretofore made. I give, devise and bequeath my entire estate, real, personal and mixed, wheresoever situate, to my Trustees hereinafter named, to hold in trust, for the following uses and purposes:

33 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 33 Case Study #4, cont. To invest and reinvest the same, to collect the income therefrom arising and after the payment of all proper costs and charges, to pay from the net income the sum of Forty Dollars ($40.00) annually to Philadelphia Presbyterian Church, to be used by the said church to keep in good order and repair and to plant with grass and flowers in season three burial lots in the cemetery of said Church, being Lot No. 47 in the name of Bobby Doe, Lot No. 46 in the name of Jen Doe, and Lot No. 221 in the name of Tracy Doe, in the cemetery of the said church unless and until other provision for the maintenance of such lots is made as hereinafter provided; and to pay the balance of the net income in quarterly or other convenient periodic payments to my daughter, Jane, for the term of her natural life. Upon the death of my daughter, the balance of the net income of the said trust fund shall be distributed by my Trustees to the Trustees of the Philadelphia Presbyterian Church, Philadelphia, Pennsylvania, to be used by the said Church in such manner and for such purposes as they shall determine; and in the event the said Presbyterian Church shall at any time hereafter no longer be used as a Church, them my Trustees shall thereupon terminate all payments of income from said perpetual fund to said Church and shall remove the bodies interred in the burial lots aforesaid in the cemetery of said Church to some other cemetery having perpetual care of lots, and thereafter pay, in perpetuity, the balance of the net income from the said perpetual trust fund each year, in equal shares, to the Home for Widows and Single Women and the Presbyterian Orphanage.

34 Charitable Trusts: Traps for the Unwary © 2011 Fox Rothschild 34 Contact Information Richard S. Caputo, Esquire


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