Modification of charitable trusts

Like private trusts, charitable trusts too can be modified in certain circumstances. The modification procedure is known as "cy pres", a medieval law French expression literally meaning "as near [as possible]".

In effect, a charitable trust that has become impossible or impracticable or (per the Uniform Trust Code) otherwise wasteful may continue if a court can find an alternate specific purpose for the trust derived from the general purpose behind the trust's original (and now impossible or impractical) specific purpose. Simple inefficiency or inconvenience is not enough.

Cy pres should be distinguished from administrative deviation, where the charitable trust's specific purpose can be generally achieved but where technical compliance will defeat or substantially impair the accomplishment of the trust's purpose, or otherwise will render that problematic.

The case of the Pennsylvania-based Barnes Foundation illustrates many of the challenges posed by the cy pres and deviation doctrines. At what point do the implementation of these do impermissible violence to the charitable intent of the settlor? And to what extent should that count?

Charitable trusts

Charitable trusts are trusts established for a recognized charitable or public purpose that may survive even if they are for unspecified individuals and/or operate indefinitely. In this context they are exempt from rules that would burden and limit private trusts. Despite their lack of identifiable beneficiaries, they are enforceable by a state's attorney general, who supervises them in the public interest.

A charitable trust must fall into one or more specific categories:

• advancement of religion
  
• advancement of education
  
• promotion of health
  
• relief of poverty
  
• governmental and municipal purposes
  
• other public purposes
  

These categories may themselves be problematic. Consider the following would-be charitable trusts?:

• for the Democratic Party
  
• to pay the salary of all Pitt professors of Estates & Trusts
  
• to establish communism in the United States
  
• to fund a public radio (NPR) station
  
• to promote Scientology
  
• for such persons as the Rev. Eleazer Wells should select
  
• for the support of the working classes
  
• to publish the judgments of Antonin Scalia
  
• for the upkeep of a cat
  
• for the support of veterans

Charitable trusts must be charitable on objective grounds, not just in the mind of the settlor.

Apart from being good in themselves, charitable trusts may yield certain tax advantages for settlors.

Modification and termination of trusts

Because trusts are designed to operate over time, circumstances - such as an economic downturn, for example - may arise which suggest or even in theory require the modification of trust terms. Private trusts can be modified beyond the settlor's death by agreement of the beneficiaries so long as the modification is deemed in accordance with the settlor's original intent. At times, however, this may be hard to determine. A number of scholars have argued that the rules for modification should be liberalized.

The law of trust termination is similar. Even if all beneficiaries consent to premature termination of the trust before its purpose has been accomplished, it cannot be terminated if that would have been contrary to the interest of the settlor. The English rule on termination is broader.

Discretionary trusts

Trusts can be either mandatory or discretionary. Mandatory trusts require the trustee to follow the specific direction of the settlor to pay income or principal as required. Discretionary trusts, on the other hand, allow the trustee to decide what specific amounts of income and/or principal to pay to beneficiaries, and may even allow the trustee to decide which beneficiaries to favor or to pay beneficiaries at all.

Because the right of beneficiaries to specific funds under a discretionary trust is indeterminate, courts have held that creditors may not be able to reach discretionary trust funds that have not yet been paid down to a beneficiary.

The existence of discretionary powers imposes responsibility on a trustee to adhere to the settlor's discretionary terms and not to be reckless in exercising those powers. This does not mean, however, that the trustee in a discretionary trust does not have significant latitude, to the extent that beneficiaries may have little remedy in the face of all but the most atrocious actions. At the same time, trustees may have precious little guidance on just how to exercise their discretion.

Revocable trusts

Revocable trusts are frequently used or recommended as "will substitutes" capable of transferring property at death without will formalities or the burdens of the probate process. Often referred to as revocable living trusts or just "living trusts" (here's a sample living trust form) they pass some degree of control over the settlor's assets out of the settlor's hands but may be modified or canceled outright by the settlor at some future time.

Precisely because they allow the settlor to "have his cake and eat it too" they have traditionally been suspect as devices for potentially avoiding creditors or other dependents, but in recent decades - urged on by convincing (but sometimes over-zealous) advocates drawing on general public dissatisfaction with the probate process - courts and legislatures have been more accepting of them while generally cutting down the extent to which they can be used as shelters. They can still go too far, however - so called "control trusts" where the settlor holds virtually all powers over property while purporting to hold it under trust terms are invalid.

As revocable trusts have become more common as will substitutes the law governing them has become more elaborate. In a variety of instances, courts have applied rules and principles from the law of wills to cover gaps in revocable trusts law, but this begs the question of whether they should, as treating the two instruments as subject to a single wills-derived scheme may ultimately burden trusts law with the very assumptions, conditions and requirements it was designed to avoid.

Creation of trusts (cont.)

A private trust requires specific trust beneficiaries, although those may remain undetermined for an amount of time defined by the rule against perpetuities. If there are no specific beneficiaries or if the beneficiaries are indeterminate, then the trust is unenforceable and will fail unless it can be classified as charitable. The beneficiaries must be legally-recognized entities who can enforce the trust terms against the trustee - a trust for the benefit of a specific animal, for example, is per se invalid unless the trust can be regarded as precatory.

Although trusts can theoretically be created orally or in writing, oral trusts can be problematic if they are in relation to land or ancillary to a will where the will itself is insufficiently specific to create a valid trust. "Secret trusts" where the trust is not at all evident from a will are particularly problematic.

Creation of trusts

We've already encountered trusts incidentally when talking about wills, and you may already have a good sense of what they are, but here's some boilerplate from the ABA that sums the concept up nicely:

A trust is a legal relationship in which one person (or qualified trust company) (trustee) holds property for the benefit of another (beneficiary). The property can be any kind of real or personal property--money, real estate, stocks, bonds, collections, business interests, personal possessions and automobiles. It is often established by one person for the benefit himself or of another. In those cases, it generally involves at least three people: the grantor (the person who creates the trust, also known as the settlor or donor), the trustee (who holds and manages the property for the benefit of the grantor and others), and one or more beneficiaries (who are entitled to the benefits).

This may sound complicated, but, respectfully taking exception to some of Justice O'Connor's cautionary comments in Hodel v. Irving, they are really fairly simple devices.

Trusts may be used for lifetime purposes or as part of - or even as *the* - estate plan. The device has a long history, going back to the Middle Ages and the concept of the use.

Trusts can be created orally or in writing. How you create a trust really depends on what you are putting in trust. Trusts of real property must be in writing. A trust can be set up in a will ("testamentary trust"); a will can also pour assets into a pre-existing trust ("pourover will").

Trusts are generally easier to create and change than wills. So-called living trusts can and certainly have been used to avoid probate but that does not mean that trusts are necessarily appropriate for all after-death transfers. Living trusts are not subject to same degree of court oversight and they may end up not covering all a decedent's assets, raising the prospect of partial intestacy if a decedent dies without a will. In this context estates lawyers still advise their clients to make a will and - if a living trust is the centerpiece of their estate plan - to provide for a pour-over of any probate assets into the trust for distribution according to its terms.