Charitable trust

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Wills, trusts and estates

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Trusts

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Governing doctrines Pour-over will Cy-près doctrine Trusts and conflict of laws

Estate administration

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Related topics

Advance directive (Living will) Totten trust

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v • d • e

A charitable trust is a trust established for charitable purposes, and is a more specific term than "charitable organisation".

United States

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Charitable trusts may be set up inter vivos, during a donor's life, or as a part of a trust or will at death, as testamentary.

Charitable remainder trusts are irrevocable structures established by a donor to provide an income stream to the income beneficiary, while the public charity or private foundation receives the remainder value when the trust terminates. These "split interest" trusts are defined in §664 of the Internal Revenue Code of 1986 as amended and are normally tax-exempt. A section 664 trust makes its payments, either of a fixed amount (charitable remainder annuity trust §664(d)(1)(D)) or a percentage of trust principal (charitable remainder unitrust), to whomever the donor chooses to receive income. Normally, the donor may claim a charitable income tax deduction, and may not have to pay an immediate capital gains tax when the charitable remainder trust disposes of the appreciated asset and purchases other property as it diversifies its portfolio of trust property. At the end of the trust term, which may be based on either lives or a term of years, the charity receives whatever amount is left in the trust. Charitable remainder unitrusts (§664(d)(2)(D)- paying a fixed percentage) provide some flexibility in the distribution of income, and may be helpful in retirement planning, while charitable remainder annuity trusts paying a fixed dollar amount are more rigid and usually appeal to much older donors unconcerned about inflation's impact on income distributions who are using cash or marketable securities to fund the trust.

Charitable lead trusts make payments, either of a fixed amount (charitable lead annuity trust) or a percentage of trust principal (charitable lead unitrust), to charity during its term. At the end of the trust term, the remainder can either go back to the donor or to heirs named by the donor. The donor may sometimes claim a charitable income tax deduction or a gift/estate tax deduction for making a lead trust gift, depending on the type of a charitable lead trust. Generally, a non-grantor lead trust does not generate a current income tax deduction, but it eliminates the asset (or part of the asset’s value) from the donor’s estate.

If the trust has qualified under laws such as Internal Revenue Code section 501(c), donations to the trust may be deductible to an individual taxpayer or corporate donor.

United Kingdom

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Registered Charities in the United Kingdom may be constituted using various forms of document: those with a "Trust Deed" are Charitable Trusts. (Those with "Memorandum and Articles of Association" are Charitable Companies and those with a Constitution are based on unincorporated associations.)

A charitable trust is a type of purpose trust in that it promotes a purpose and does not primarily benefit specific individuals.

The purpose of the trust is to benefit society as a whole or a sufficiently large section of the community so that it may be considered public. Thus a charitable trust is a public purpose trust and is enforceable by the Attorney General on behalf of the Crown in England. However, in England it is normally the Charities Commission, which oversees and regulates charities (and the Office of the Scottish Charity Regulator in Scotland).

Generally speaking, charitable trusts are subject to the same rules as private trusts, but as a result of the public nature of such bodies, they enjoy a number of advantages over private trusts.

Advantages of Charitable trusts

Certainty of Objects Courts are more relaxed in the approach for the need of there to be certainty of objects in a charitable trusts. While non-charitable trusts must have objects, which are certain, gifts made exclusively for charitable purposes are valid even though the exact purposes may not have been identified. Thus a gift to trustees ‘for charity’ will be valid.

The Perpetuity Rule Charitable trusts are valid even though they may last for an infinite period of time. They are also exempt from the rule against inalienability. However, charitable gifts, like private gifts are subject to the rule against remote vesting.

The Cy-Près Doctrine In a situation where a private trust has failed either wholly or partly, there will be a resulting trust for the settlor or his estate. Where property is given for charitable purposes and these cannot be carried out in the precise manner intended, then it will simply go to a charitable purpose that is deemed to be similar. Thus, the cy-près doctrine is an alternative to the resulting trust principle.

Fiscal Privileges a variety of tax relief’s are enjoyed by both charitable bodies and members of the public who donate funds for charitable purposes. Charities are exempt from income tax on investment and corporation tax. They are also exempt from the capital gains tax, stamp duty tax and national insurance surcharge Finance Act 1977.

There is no exhaustive list to what a charity is. Though there has been a long list of what may be charitable in the Charitable Uses Act 1601. This was repealed by the Charities Act 1960 S.38.

This section said that when looking at the definition of a charity, you must look at the meaning and interpretation of the preamble. Thus, it still remains an influence on the law.

For a trust to be deemed charitable, it must be for the benefit of the public Verge v Somerville: This an objective test, not a subjective test, since it is a question of law whether the trust is charitable, not the intention of the person setting it up.

Charitable Trusts must benefit the public in some way.

RE Compton where it was held that a trust for the education of the children of three named relatives was not charitable: Will not be charitable if there is a personal nexus between the donor and the beneficiaries or between the beneficiaries themselves. I.e. Blood relatives. As clearly, this will not be a public benefit.

The usual test used today is laid down by their Lordships in IRC v Pemsel. To be charitable, a trust must be one of the following purposes:

1) The relief of Poverty [Public benefit test does not apply]

Poverty includes destitution but is interpreted liberally so not to mean destitution. The gift is required to relieve the misery of poverty by providing the basic necessities of human existence – Food, Shelter and clothing. From the preamble of 1601 Act, relief of poverty includes aged, impotent and poor people Biscoe v Jackson: A gift to establish soup kitchens was charitable. IRC v Baddeley: The Court pointed out that poverty did not mean completely poor, but rather in need of a necessity in life. Re Gordon^[1]: Trust was set up to provide temporary residence for ladies on limited means.

To be valid, the trust must be exclusively for the poor. If it benefits persons other than the poor, even coincidentally, it will not be valid under this head.

Re Saunders: Money was left to provide dwellings for ‘working classes’. It was held that not all members of the working class are poor.

2) The Advancement of Education

Education has been interpreted generously and is not restricted to the classroom mode of disseminating knowledge but requires some element of instruction or supervision. Thus, research is capable of being construed as the provision of education. Mere acquisition of knowledge without dissemination or advancement will not be charitable.

Must impart or promote knowledge.

Incorporated Council for Law Reporting v A.G: Publication and dissemination of judicial decisions in the reports was held to be charitable.

Re Webber: A gift made on trust to further activities of the Boy Scout Association was held to be charitable.

Royal Choral Society v IRC: Included performing and preparing choral works. Was held to be charitable and educational.

Research and aesthetic or artistic education must, if it is to be charitable have sufficient quality and usefulness of purpose as was stated in Re Pinion. This is an objectives test for the Court.

Promotion of sports in educational institutions: are charitable on grounds of advancement of education [But generally sports and their promotion are not charitable- Re Nottage

Re Mariette: Money left to build squash courts at a school was held to be charitable as it provided facilities in school, which meant that the sport has to be taught. Education includes developing the body as well as the mind

Political propaganda masquerading as education: will not be charitable.

Bonar Law Memorial Trust v IRC: A training trust was set up to teach political principles of Bonar Law, held not to be charitable as it was not an educational charitable trust. It was training, but not in the sense of benefiting the community. It was merely the promotion of political doctrine.

3) The Advancement of Religion

Definition: A religion is a particular system of faith and worship, it involves a man recognising some higher power which has control of his destiny and which is entitled to reverence and worship.

Thornton v Howe: Publication of works of a woman who had strange religious beliefs. Held: It was published and there was a higher being

Re Charlesworth: Money was left to a society of clergymen to give them a free annual dinner: Held to be charitable as the free dinner was an inducement to join the clergy as it would advance religious.

Must advance religion in some way, perhaps through instructions or any activities, which spread or promote religion: United Grande Lodge of Freemasons v Holborn B.C [Freemason case]

Upkeep of churchyards, maintenance of places of worship, gifts for clergy, provision of an organ or maintenance of choir is also included.

The fact that it has only a few members will not automatically invalidate it- Re Watson A gift for saying of masses is charitable as it increases the stipend of priests Re Hetherington

4) Any other purpose beneficial to the Community not falling within the other three categories.

These are trusts for "the advancement of objects of general public utility" (Morice v Bishop of Durham).

Trusts to help the sick and disabled

Derives from the impotent part of the preamble. Again, provided the purpose relives a need, which is due to the beneficiary’s condition, it is sufficient to be ill. Beneficiaries do not have to be aged and poor as well.

Re Lewis: Concerned a trust to pay sums of money to blind boys and girls who lived in Tottenham, held to be charitable.

Re Banfield: A trust established to help drug addicts. This was an illness. Re Smith W.T: A gift was made to help a general hospital, held to be charitable. [Must not be a private hospital, unless profits are ploughed back into patient care].

Trusts to help the aged

People who are old, provided the purpose is to relieve a need attributable to their age, do not have to be sick and poor.

Re Bradbury: Trust was set up to provide for ‘the maintenance of aged persons in a nursing home’, was held to be charitable and there was no need to mention them being poor or sick.

Therefore, if they are aged, but need to pay maintenance for homes/flats, then it will be charitable as there is no need for them to be poor Re Payling’s W.T.

Trusts to promote the efficiency of the armed forces, the police and other emergency services.

The idea is that if these services are efficient then it safeguards and benefits the communities. So if a gift promotes efficiency, then it is a valid charitable trust. The courts have liberally interpreted ‘efficiency’.

Re Gray: Trust to provide prizes for regimental sports, charitable as it promoted physical fitness and thus improved regimental spirit.

Re Meyers: Trust for welfare, benefit or assistance or members of the Royal Navy, past, present and future. Was not charitable because to be valid it would have had to be limited to those former formers who were poor or aged.

Trusts for local authority and other homes

e.g. Dr Barnado’s. To found or maintain such homes, especially for those children or orphans who need residential care, will be charitable:

Re Cole. Trust created by will, was for the benefit and welfare of children in a home provided and maintained by the local authority. Held that it was not charitable because the phrase ‘benefit and welfare’ was too wide and was capable of being used for non-charitable purposes. This case was heavily criticised.

Trusts for political and political Activity

Trusts for political purposes are not charitable. Thus, any trust whose main object is the support of a political party will not be charitable. Even if they want a change in the UK law or abroad.

Bowman v Secular society: Objective was that there should be an end to religious discrimination and so a change in education law. Not charitable.

Social, Sporting and Recreational Trusts

It has always been established that trusts to promote sport are not charitable [unless they can be shown to be educational or promote efficiency in the armed forces]. However, a series of cases in the 1940’s and 1950’s raised uncertainty as to whether any recreational purposes could be charitable.

LRC v Glasgow Police Athletic Association. The court looked at the primary function which was recreational and sporting facilities, held not charitable.

Recreational Charities Act 1958: If recreational facilities are provided with the object of improving the condition of life of the users and if: i. Facilities are needed by those users because of their age, youth, age, infirmity or social or economic factors and the trust is for a public benefit or ii. The facilities are available to the public at large and the trust is for public benefit.

Then it will be charitable. Those benefiting do not have to be poor or deprived. So long as the facilities will improve the conditions of life for members of the community generally will suffice Guild IRC

India

In India, trusts set up for the social causes and approved by the Income Tax Department, get not only exemption from payment of tax but also the donors to such trusts can deduct the amount of donation to the trust from their taxable income.^[2] The legal framework in India recognizes activities including "relief of the poor, education, medical relief, and the advancement of any other object of general public utility" as charitable purposes.^[3] Companies formed under Section 25 of the Companies Act, 1956 for promoting charity also receive benefits under law including exemption from various procedural provisions of the Companies Act, either fully or in part, and are also entitled to such other exemptions that the Central Government may accord through its orders.^[4]

Iran

Currently, in the Islamic Republic of Iran, religious charitable trusts, or Bonyads make up a substantial part of the country's economy, controlling an estimated 20% of Iran's GDP. Unlike some other Muslim-majority countries, the bonyads receive large and controversial subsidies from the Iranian government.^[5]

See also

Charitable organisation
Charity
Foundation (nonprofit organization)
Trust (property)
Waqf

Notes

References

• Hayton & Marshall (2005), Commentary and Cases on the Law of Trusts and Equitable Remedies (12th ed.)
• Gaudiosi, Monica M. (April 1988), "The Influence of the Islamic Law of Waqf on the Development of the Trust in England: The Case of Merton College", University of Pennsylvania Law Review 136 (4): 1231-1261
• Hudson, A. (2003), Equity and Trusts (3rd ed.), Cavendish Publishing, ISBN 1-85941-729-9