You are not my attorney, etc. etc. Here is the situation, in the State of Hawaii:
TLDR version (but of course you’ll read the details, law being what it is): A nonprofit organization that benefits very little from a Trust which was set up to help it would like to cut ties with that Trust, as it is far more aggravating than it’s worth. Can the organization legally refuse further income/interaction from the Trust?
DETAILED VERSION: Ten years ago the (now former) board chair of a non-profit arts organization set up a trust, as a separate 501c3 from the arts organization. The money was taken from the coffers of the art org, and was pretty much all of the organization’s assets at the time, about $250k.
The trust was set up to be irrevocable and so that no principal could ever be distributed. The only purpose of the trust is to provide its interest payments to the arts organization. The money is in CDs and is performing so poorly that at the moment expenses exceed interest.
The whole thing is very questionable and at least twice the organization has consulted attorneys about disbanding the trust, on the basis that the trust doesn’t follow the “prudent man rule” (in other words, $250k should have produced a hell of a lot more income than it has). However, the trust founder fights tooth and nail, to the point of issuing a cease and desist letter against the last person who tried to spearhead a legal assault on the trust. The founder is very wealthy and can bring high-powered legal representation to the fight. The arts organization is broke, having never financially recovered from being gutted. It depends on the kindness of attorneys willing to give pro bono advice.
The max amount ever distributed from the Trust was maybe $2500 in a year; sometimes less. The last minutes of the Trustees note that expenses (PO box, accountant fees, etc.) exceed the interest income being earned.
This problem is a huge time sink for the organization, as it absorbs time while successive generations of board members/executive directors realize the ramifications of the Trust and how effed up it is. Time is also taken attending Trust meetings and begging for money to be released (never to any avail). Finally, and this may be the most important point from a legal standpoint - though as a practical matter it’s not as compelling for arts org board members because it doesn’t seem like a real risk - pro bono counsel tells the art org that the members of the board could be held personally legally liable for failing to pursue the matter of how questionable the Trust is.
The strategy now under consideration by the arts org board is basically to tell the Trust to f**k off, we don’t want your money. It may make economic sense to do this, as the value of the time spent messing around with Trust issues exceeds the value of the pittance received in interest.
So, can a nonprofit organization that is the sole beneficiary of an irrevocable trust tell that trust that its contributions are no longer wanted? Through proper legal means, so that the Trust officially had no reason to exist anymore?
If that happened, the organization does not expect to ever see money from the Trust. They’d find a way to give it to someone else. That’s expected and part of the (hypothetical) plan.
If you have any thoughts on this, you have my deepest gratitude. Thank you.
Nobody can force you to take money you don’t want. They can continue sending checks and you can just throw them out. What I’m curious about is the propriety of the original board member using the art org’s assets to set up the trust in the first place.
Thanks, or “mahalo” as we say in Hawaii. It’s been a long day, and after putting the question in GQ my hazy brain realized that was most likely a mistake.
Observations and opinions, as well as hard legal facts, are definitely appreciated.
Sorry that I have no useful advice. I would like to say that it is unfortunate that something that should be fun and beneficial is causing you such a headache.
Pomaika’i!
Is there not some regulatory body overseeing charities in the state that could/should be investigating the original transfer of funds and subsequent management of the money, rather than this being a private dispute between the (ostensible) beneficiary and the person holding the foundation’s purse-strings?
IANAL. It sounds like there’s three different issues going on.
The creation of the Trust from the Arts Org’s assets. It sounds like many Arts Org directors disagree with the actions of the former chair and have tried to reverse the movement of assets into the Trust, but their efforts have failed. Now, they’re considering giving up on this effort. It’s fine for them to do so. If they’ve already made a sincere effort to retrieve the funds, and that was unsuccessful, there’s no legal or fiduciary responsibility to continue that effort. Have a board meeting where an item on the agenda is to discuss further attempts to retrieve the money, have a vote on whether to do so or not, and record the results of the vote in the minutes. However, I suspect the desire to write-off the transferred funds may not be as uniform across the Arts Org board as the OP is implying.
The ongoing relationship between the Arts Org and the Trust. Were any contracts or other legal agreements made between the Arts Org and the Trust? If so, the agreement may be that as long as the Trust is sending the Arts Org money, the Arts Org will provide services such as an accounting of the funds received, or participation with the Trust. Such a contract should have a break clause. Even if there isn’t, as long as there’s no clear time frame and quantified monetary amounts, the Arts Org should be able to unilaterally terminate the agreement. Contracts, especially ones with unspecified details, generally can’t be mandated into perpetuity.
The ongoing actions of the Trust, including the decision of whether or not to continue the present funding of the Arts Org, and whether to dissolve the Trust. That’s entirely up to the Trust and not the Arts Org’s problem, so long as it terminates any current agreements with the Trust. The entire point of a trust is to create an arms-length separation between the trust funds and the recipient, and a separate decision making structure. If the Arts Org tells the Trust they will not longer carry out actions described by the OP as a time sink, then it’s up to the Trust whether they continue to make donations to the Arts Org, or whether the Trust’s charter allows them to make donations to other arts organisations.
PS I don’t think the Arts Org refusing donations from the Trust would force the Trust to dissolve, at least in the short-term. The trustees need to follow the Trust’s charter and should act in good faith, but that principle allows them a lot of latitude. It sound like the former chair basically controls the Trust, and if he’s spurned by the Arts Org, he’ll probably look for someone else to donate to, or just sit on the money until the Arts Org has a future shift in leadership, and he can start dealing with them again.
This is the critical bit. The board members have a legal responsibility for the assets of the organisation. They can’t just give away the money. They can’t just give away the money to their firends, and they can’t just give the money away to their enemies, and they can’t just give the money away to a big bad scary evil trust.
So the question is, how can they avoid that responsibilty. The obvious way is to not be a board member… There may be other methods: perhaps the legal advisors they have haven’t been able to come up with any other ideas.
I’m in no better position to offer legal advice than the existing pro-bono lawyers, but I’ve been a board member before: I’d advice the people interested in Art to resign and set up a new organisation, and invite people interested in Law to take over the old organisation, with the sole aim of maintaining the organisation until the asshole dies and any remaining money can be reclaimed.
(I’m not a lawyer, but I’ve been Treasurer & Finance Director of various non-profit organizations for 30 years now.) These items occur to me:
original transfer of funds: seems questionable, but the founder probably had the board of that time vote to do this. So it might be hard at this time to undo that. (How long ago did this happen?)
management of the Trust funds: 1% return seems really low. Especially for long-term investments, that aren’t needed for the day-to-day operation of the organization (which they obviously aren’t). Those funds should be invested in something with a higher rate of return. (Which also means a higher risk. But since the current board seems to think that the funds are irretrievably gone already…)
why are expenses so high? Seems quite unreasonable. Cut them down. Why do you need a PO Box for such a nearly-inactive trust? Change the mailing address to the home of a board member. Accounting fees? What for? (It sounds to me like your accountants are ripping you off!) If all the assets are in bank CDs, what ‘accounting’ are they doing? With that small an income, the only IRS form you have to file is the 990-N, an electronic postcard. What fee are they charging for that? Ask your accountant straight up why their fees are so high.
Look into the founding documents of the Trust, and see how their governing officers are chosen. (And verify that the method complies with state law.) See what would be needed to ‘take over’ the Trust. Might be easier than you think.
Stupid question from a layman: Why can’t the members of the board just all quit? Or dissolve the charitable organization entirely? Then form a new organization with enough of a different mandate so as to preclude lawyers yelling that they are playing legal tricks.
How is the organization tied to the trust? That is, what obligations does the organization owe to the trust and what happens if the organization stops? If the answer is “nothing,” you have your answer.
Did the board chair have the unilateral authority to do this? Ordinarily, the chair has no special power over the organization and the board must vote as a whole to use its power. Did the whole board authorize this transaction? If so, why?
Alternatively, the board can sometimes delegate their authority to a committee or an individual to take this action. Did the board chair take this action pursuant to a valid delegation of authority?
If this was a duly-authorized action, either by the board or through a proper delegation of authority, there might be little you can do to unravel it now.
Also, if the board approved this action, did they know about the chair’s relationship to the new trust? The chair isn’t allowed to engage in self-dealing transactions so he should not have voted to give the money (or unilaterally given the money by delegated authority) to a trust that he was going to run.
Generally, the trustees have an obligation to manage the account prudently. Are they doing so? If not, you could report them to the state Attorney General or the equivalent overseer in Hawaii for non-profit organizations, which might look into it. Or not. They are often busy with bigger issues.
Is the founder the same person as the former board chair? Anyone can send a cease and desist letter. I could send one to you telling you to cease and desist from posting on the StraightDope. You could send me one back telling me to pound sand.
My guess is that the organization has no particular standing to disband the trust. The trust doesn’t belong to the organization. The organization is the beneficiary but it is generally entitled only to what the trust gives the organization.
The real question is, what conduct did the founder tell the organization to cease and desist from and on what legal basis does the founder insist it has the authority? Do your attorneys agree that this is legally sound authority?
Where did you get the minutes of the trustees?
The real fault seems to have been with the board that authorized the organization’s gift to the trust originally. There are suggests that was an improper use of the organization’s assets, tainted through the former chair’s self-dealing. If it’s the same board members on the board today, they should worry that they have failed to fulfill their fiduciary duties. I can’t comment on whether they could be personally liable under Hawaii law but many states grant greater protections from personal liability for unpaid volunteers who serve on non-profit boards. They might also be absolved if the the former chair did not tell them about the self-dealing (although that’s not the only potential fiduciary failing in this transaction).
For what my uninformed opinion is worth, I too see relatively little personal liability risk for today’s board members. It sounds like their legal counsel has advised them that it will likely be fruitless to pursue action against the trust. If the board make the reasonable decision to stop pursuing it, action against them seems unlikely.
It may be perfectly prudent and reasonable for the board to conclude that the time spent pursuing grants from this trust would be better spent on any other activity in the organization’s interest and that, perhaps, the board has no particular obligation to pursue or seek funds from this trust any more. If the trust can only do one thing with its money - give it to the arts organization unconditionally - it doesn’t seem that the money would stop even if the arts organization board stopped playing along.
The trust has to do with its property what the trust instrument says it will do. Based on what you’ve said here, the trust might say something like, “invest the funds {perhaps specifically in insured bank deposits) and give the income (but not principle) to the arts organization, subject to these conditions…”
The trust probably also has a residuary clause that says, “if you can’t give money to the arts organization (e.g., because it closes or because it won’t comply with the conditions), then give the income to this other organization.” That residuary clause means that you are right about what will likely happen if the arts organization doesn’t keep taking the money. The trust will probably continue and it will just give the money to some other charity. That’s by design and not some nefarious outcome.
The board of the arts org could all quit, but it is unclear what that would accomplish, other than to destroy the organization (the unpaid board members do the bulk of the work keeping the organization going).
If a new organizational board formed, they still would have no power over the trust.
(Sorry if I’m not understanding your questions properly.)
But they would no longer have a connection to the trust, which you stated would be better than having a connection. If a new organization were formed, to do the exact same thing as the current organization, it seems like it would be in a better financial situation since it wouldn’t have the cash sink of the trust to deal with either. It wouldn’t have any assets either in the beginning but you said that the current organization is broke as it is. How possible is this I don’t know either.
As far as I know, there is nothing in the law that obligates the organization to the Trust. The organization could stop functioning at any time … but it’s unclear why it should. The organization serves the community and it would be strange and counter-productive to just stop. Cutting of one’s nose to spite one’s face, probably.
As I understand it (I was not around at the time), yes - the Board chair did not have unilateral authority, but that person had stacked the Board with friends who believed the chair and did what the chair wanted.
All valid observations, as far as I can tell from what attorneys are saying.
Yes, exactly.
Yes.
Good questions; the answers are unknown unfortunately. I can only speculate. We have reached out to the target of the “cease and desist” letter but that person hasn’t answered. They may have washed their hands of the whole mess in exhaustion and simply moved away.
Depending on which minutes you mean, they were in the arts org files or given to the arts org at the last trust meeting.
That’s what the pro bono attorneys seem to say.
Some the same, some sort of new or very new.
Thanks. Your other comments that I haven’t quoted are pretty much on the right track, BTW.
We’ll see what happens.It will be interesting to see what the pro bono attorneys say in light of the latest developments.
I was mostly getting at whether the organization owed some duties to the trust in contract. For example, a non-profit I work with has a grant agreement with a trust. The trust owes us money on a regular schedule and we are obligated to do certain things for the community and to provide the trust with regular reports. Does the arts organization have a contract like that with the trust? If not, the trust is just one source of money among millions. The organization can seek seek operating money from other sources and ignore the trust and its goon squad - I mean generous benefactors.
You mentioned having the trust’s minutes above. It’s not really I important but I wondered how you got them. Mostly, I was curious if some current board member was also a trustee of the trust.
there is no need to disband the organization and start over when the simpler solution seems to be for the organization to just ignore the trust. Your solution is a bit like asking, “I don’t like it when my neighbor comes to my dinner parties. Can I burn my house down and move to Guam?” Yes, you can, but perhaps the easier way is to stop inviting the neighbor to your parties.
Possible mismanagement of the trust is a problem for the trustees, not the organization. IANAL.
Go to the next trustee’s meeting, tell them “We think this trust is being mishandled, and we have done all we could about it. We don’t have the resources to fight it, so we are reporting it to the state AG and washing our hands of it. We will not accept any further contributions. Have a nice day.”
Then mark all further contributions “Refused” and send them back.
How far do they have to pursue it? Okay, the founder/former board chair pushed the organization into a bad decision. Now the organization realizes it. They have tried to remediate the decision, and the founder fights it. Tell the AG that you don’t have the money to hire lawyers and have done something resembling due diligence to undo the bad decision.
I don’t think there needs necessarily to be malfeasance by the former chair - some people are just stubborn. He thinks/thought this is how it should be done. It was dumb, but you have to move on.
Let the trust go to the next beneficiary, or (more likely) get pissed away in administrative costs and legal fees. It’s a waste, but what can you do?
There are a number of points made above that are extremely on point. Sincere thanks to all who have responded.
You know how sometimes there are threads on the Dope, often quite intriguing (not saying my issue is all that fascinating, but generally speaking)…and then the OP goes silent because of legal stuff - leaving readers in suspense, wondering how things will turn out? I think that’s where I am. An attorney has agreed to represent me personally in the event that this blows up to the point of there being legal challenges to individuals, and that same counsel has connected the arts org with a trust specialist who will represent the organization pro bono. Good stuff - and probably not things I should blab about over the internet.
I have a history, I think, of being relatively good about doing later updates when I seek info from the Dope. I promise to do that in this instance. There may be a story here, and if there is any dust that eventually settles, I’ll come back to detail good vs. evil and who emerged victorious. Wish the arts org luck!