Setting up a charitable trust
From time to time individuals, families and others who wish to benefit a charitable cause in perpetuity choose to set up a charitable trust.
Charitable trusts enjoy a number of advantages. These are:
- A charitable trust does not need to observe the usual limitation on time of operation, and may carry on indefinitely
- The income of a charitable trust is exempt from taxation
- Uncertainty of intention will not invalidate the trust as long as the Court can be sure that the settlor had a charitable intention - lack of clarity of intention may however cause considerable problems for the trustees. There is a fine line between providing flexibility that will take account of changing circumstances over time and vagueness.
Objectives
In order to qualify as a charitable trust for taxation purposes the objectives of the trust must fall within the following:
- The relief of poverty
- The advancement of education
- The advancement of religion
- Any other purpose beneficial to the community
In general a charitable trust cannot benefit individuals and the activities must be confined to New Zealand with very limited exceptions.
It is also important that the trust observes the following:
- The potential beneficiaries of the trust must be a sufficiently wide group of the community
- What the trust provides must be of benefit to society.
It is useful to have a specialist in the area consider the wording of the objectives clause to ensure that it meets legal requirements.
Winding up
An important related aspect concerns the ultimate distribution of the assets of the charitable trust when it is wound up. Again, it is possible for a general description of a 'head of charity' as being the entity or entities to which the funds are to be distributed, or quite a detailed prescription of the type of charity and its specialisation.
Trustees
Thought needs to be given to the appointment of the initial trustees and the method of appointment (or election) of subsequent trustees. In this regard, the minimum and maximum number of trustees needs to be addressed. In accordance with usual principles of corporation governance, there are advantages in having between five and nine trustees, rather than a smaller or greater number. However, this is not a fixed principle as there are a number of successful trusts that have larger numbers of trustees. With respect to the position of trustees, it is important to determine at the outset whether or not the trustees are to be remunerated. If there is to be no remuneration, the position can be simply stated in the trust deed. However, where remuneration is to be paid, compliance with the tax rules relating to the determination of remuneration of trustees needs to be addressed. In essence, it is unlikely that the trustees themselves can determine their own remuneration without being in breach of the Income Tax Act. If there is a wish to remunerate trustees the best mechanism is to tie maximum remuneration to an externally determined scale such as a percentage of the remuneration of a local authority member or other such external standard.
Assets
The important issue concerns the investment of the assets of the trust. Consideration needs to be given to whether or not all the principles set out in the Trustee Act 1956 with respect to the investment of trust funds will apply to the charitable trust. This has implications for the standard of care of any professional persons who are trustees and for the position of large assets (such as farms or building complexes) that are to be owned by the charitable trust. It is often desirable to explicitly require the trustees to appoint an investment advisor, particularly where significant investment assets will be managed by the trustees of the charitable trust.
It is also desirable for the trust deed to identify whether or not the charitable trust will receive assets that are subject to specific stipulations that effectively require the operation of a sub-trust by the charitable trust.
Incorporation
Another issue which is sometimes important concerns the question of incorporation as a Charitable Trust Board. Under the Charitable Trust Act 1957, there is provision for registration as a Charitable Trust Board. The key implication is that assets owned by the trust do not need to be transferred into new legal ownership every time there is a change in the trustees. The Charitable Trust Board is effectively a separate legal entity.
Distributions
It is often desirable that the Charitable Trust Deed expressly provide for the manner in which distribution decisions are made by the charitable trust. One advantage of making such a provision in the Charitable Trust Deed is that it forces the trustees to consider investment decisions and business operation decisions separately from distribution decisions.
Finally it is important that the settlor consider whether the assets being placed in the trust are sufficient to justify the setting up of a separate trust. The costs of administering a charitable trust can be significant and smaller trusts will often need to buy expertise around the areas of investment and distribution. It may be that the assets would be more effectively managed in another vehicle such as a fund within a community foundation which can allow the donor naming rights if desired, or as a sub trust of another charitable trust with very similar objectives and an existing infrastructure that allows for effective administration. It is also possible for a family trust to make deductible donations to charity if the deed makes provision for such gifts. It is important to note however that family trusts have a limited life while a charitable trust can exist in perpetuity.