Charitable Trust Doctrine

The charitable trust doctrine requires that a gift accepted by a charitable organization must only be used for the expressly declared charitable purposes of the donee corporation at the time of the acceptance, even if the corporation changes its purpose, transfers those assets or dissolves.  Such restriction is imposed notwithstanding the fact that the donor did not expressly place any restrictions on the gift.  Accordingly, if a charitable corporation amends its charitable purposes, gifts received pre-amendment may be used only to further the original charitable purposes.  Pre-amendment gifts may not be used to further the new charitable purposes if such use is not in furtherance of the original charitable purposes.

The charitable trust doctrine may apply not only to gifts received by the charitable corporation but also to revenues generated by the corporation (e.g., earned income).  The rationale for this expansive view of the doctrine is that (i) it may be impossible to separate out donations and contributions from other revenues, and (ii) such revenues may have only been derived from the “base capital” created by the donated assets.

The expressly declared charitable purposes of a charitable corporation are first evidenced by its articles of incorporation and other formal manifestations of its declared purposes.  Pacific Home v. County of Los Angeles, 41 Cal.2d 844 (1953).  They may also be evidenced by oral and informal declarations of the corporation’s charitable purposes.  Holt v. College of Osteopathic Physicians and Surgeons, 61 Cal.2d 750 (1964).  Moreover, such purposes may be deduced from the corporation’s dominant activities and its representations to tax authorities (exemption application and annual information returns) and the public.  Queen of Angels Hospital v. Younger, 66 Cal.App.3d. 359 (1977).

The exception to the general rule of the charitable trust doctrine applies where the charitable purpose has become illegal, impossible or impracticable.  In such case,  the cy pres doctrine requires that the gift accepted to further the original charitable purpose be used to further a charitable purpose that is as near as possible to the original charitable purpose.

Excerpt from Queen of Angels Hospital v. Younger

The rules governing the use of the assets of a nonprofit charitable organization are well established: “[A]ll the assets of a corporation organized solely for charitable purposes must be deemed to be impressed with a charitable trust by virtue of the express declaration of the corporation’s purposes, and notwithstanding the absence of any express declaration by those who contribute such assets as to the purpose for which the contributions are made. … It follows that … [a nonprofit corporation cannot] legally divert its assets to any purpose other than charitable purposes, and said property [is] therefore ‘irrevocably dedicated’ to exempt purposes within the meaning of the welfare exemption.” (Pacific Home v. County of Los Angeles, 41 Cal. 2d 844, 852 [264 P.2d 539].)

Employee Bonuses and the Charitable Trust Doctrine

In California, the charitable trust doctrine may also apply in cases in which a charitable organization distributes funds for a purpose not in furtherance of its charitable purposes and without any legal obligation to do so. Such cases may be common where a charitable organization provides a bonus or retirement payment to an executive or other employee without an obligation to make such payment. In order for a charitable organization to have flexibility to provide bonuses without running afoul of the charitable trust doctrine, it would be prudent for it to account for the possibility of a bonus in the job offer letter, employment contract, or other employment document in advance of the period for which the bonus is to be awarded.

Takeaways

  1. Ensure your organization is operating in furtherance of the purpose statements in your articles of incorporation and bylaws and not outside of such statements. If your organization’s purpose statement has a geographic limitation or overly limiting purpose, consider whether it needs to be amended, but be aware that assets earlier acquired assets may need to be applied to the organization’s purpose pre-amendment.
  2. If an organization wants the flexibility to pay bonuses or other forms of compensation for past services, make sure this is documented in an agreement, job offer letter, or policy at the time of employment. Even if specific details, like the amount of a possible bonus or the benchmarks to receive it, are not known at the time, the possibility of receiving a bonus may be treated as consideration inducing an employee to accept employment by the organization. This may justify the payment of a bonus for past services so long as the total compensation is just and reasonable as to the organization.

Additional Resource

Click here for the Robert A. Katz article “Let Charitable Directors Direct:  Why Trust Law Should Not Curb Board Discretion Over a Charitable Corporation’s Mission and Unrestricted Assets.”  80 Chicago-Kent Law Review (Spring 2005).  See pages 701-703 for a description of the charitable trust doctrine.