ByMargaret A. T. Cronin, Grandchamp, Guyette & Cronin, PLLC

Lowell V. Stortz, Leonard, Street and Deinard

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As defined by statute, a trustee is “a person or group of persons either in an individual or joint capacity, or a director, officer, or other agent of an association, foundation, trustee corporation, corporation, or other legal entity who is vested with the control or responsibility of administering property held for a charitable purpose”. Minn. Stat. § 501B.35 Subd. 4 (2009).

A “charitable trust" means a fiduciary relationship with respect to property that arises as a result of a manifestation of an intention to create it, and that subjects the person by whom the property is held to equitable duties to deal with the property for a charitable purpose. As used in this definition, property includes all income derived from fees for services. Id. at Subd. 3.

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Revocable Trusts May be changed or eliminated (revoked) by

Donor at any time Testamentary Trusts

Created upon Donor’s death Charitable Remainder Trusts (CRTs)

Irrevocable trust which pays a defined annual amount to a specified noncharitable beneficiary or beneficiaries for a definite period, at the end of which the trust property is transferred to one or more charitable organizations

Charitable Lead Trusts (CLTs) Irrevocable trust in which trust makes defined

annual payments to charity for a specified period, at the end of which the trust property passes to members of the Donor’s family

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Charity as Trustee May be willing to act as trustee if there is a

minimum corpus and if charity is the irrevocable beneficiary of a certain percentage of remainder

Donor Avoid self-dealing Do not have any power causing the Donor to be

treated as owner under grantor trust rules (e.g., power to control beneficial enjoyment)

Hard-to-value assets must be valued by independent trustee or qualified appraisal

Donor’s Spouse, Family Member or Friend Spouse and family member must also avoid self-

dealing Independent Third-Party Trustee

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A Trustee is held to a very high standard – the law imposes many duties that may not all be described in the trust documents. They include:

The Duty to Serve Until Replaced The Duty of Loyalty (no “self-dealing”) A Duty Not to Delegate Fiduciary Duties The Duty of Impartiality The Duty to Make Trust Distributions The Duty to File Trust Tax Returns/Other Reporting The Duty to Comply With Statutory Requirements The Duty to Oversee Investments The Duty to Account to Beneficiaries/Other Interested

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Minnesota Trustees' Powers Act contains general statutory powers of trustee. See Minn. Stat. §§ 501B.79 to 501B.82.

Minnesota Uniform Principal and Income Act contains rules regarding allocation of principal and income. See Minn. Stat. §§ 501B.59 to 501B.76.

Generally, a trustee must administer a trust with due regard to the respective interests of income beneficiaries and remainderpersons. See Minn. Stat. § 501B.60.

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Two Points Regarding The Fulfillment of a Trustee’s Duties:

1. Process, which is documented, is often more important in avoiding liability than the ultimate rightness or wrongness of a decision.

2. Duties may be altered by the document, but beware of attempts to:

Limit Liability (Exoneration Clauses) Limit a Beneficiary’s Right to Notice

Accounting, Challenge Trustee Actions

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Registration with the Minnesota Attorney General and reporting of a trust which has gross assets exceeding $25,000 during the year may be required. See Minn. Stat. § 501B.36 (2009).

However, some charitable trusts are exempt from the registration and informational reporting requirements. These include: Charitable trusts administered by the U.S., state, territory, D.C., Puerto Rico, and their

agencies or subdivisions; religious associations organized by statute; trusts organized and operated exclusively for religious purposes and administered by a

religious association; private foundation organizations described under IRC § 509(a)(3) or is operated, supervised,

or controlled by or in connection with at least one organization described above; pooled income funds under IRC § 642(c)(5) maintained by at least one above named

organization; charitable annuity trust or unitrust under IRC § 664; trust in which the only charitable interest is a contingent interest for which no charitable

deduction has been allowed for MN income, inheritance, or gift tax purposes or a trust in which not all of the unexpired interests are devoted to at least one charitable purpose and the only charitable interest is an annuity or an income interest with respect to which a charitable deduction is allowed the trust under MN income tax laws;

organizations registered with the attorney general under charitable organization requirements of Minnesota Statutes §§ 309.52-53;

trusts for individuals and charitable beneficiaries (split-interest trusts); or charitable gifts, bequests, or devises not held and continued by a private express trust or

corporation even though the gifts, bequests, or devises create fiduciary relationships (unless there is no named charitable beneficiary in existence or unless named charitable beneficiary elects in a writing filed with the attorney general and with the fiduciary to come within the provisions of the registration and information filing requirements).

Minn. Stat. § 501B.36(1)-(8) (2009).

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The Attorney General must be notified of, and has the right to participate as a party in, all court proceedings: to terminate a charitable trust or to liquidate or

distribute its assets; to modify or depart from the objects or purposes

of a charitable trust as contained in the instrument governing the trust, including a proceeding for the application of the doctrine of cy pres;

to construe the provisions of an instrument with respect to a charitable trust;

to review an accounting of a charitable trust submitted by a trustee; or

involving a charitable trust when the interests of the uncertain or indefinite charitable beneficiaries may be affected.

Minn. Stat. § 501B.41.

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Minnesota Statutes list several rules regarding trustees of private foundations, charitable trusts, or split-interest trusts. See Minn. Stat. § 501B.32, Subd. 1 (2009). Trustees must distribute for each taxable year of the trust amounts at least sufficient to

avoid liability for the tax imposed by IRC 4942(a) (1986). Trustees must not engage in “self-dealing”, defined as any direct or indirect sale or

exchange, or leasing, of a property between a private foundation and a disqualified person; lending money or other extensions of credit between a private foundation and a disqualified person; compensation payments from a private foundation to a disqualified person; transfer to, or use by or for the benefit of, a disqualified person of the income and or assets of a private foundation; and agreements by a private foundation to may any payment of money or other property to a government official, not including employment agreements for a period within 90 days of termination of government service, which would give rise to liability for the tax imposed by 4941(a). See 26 IRC § 4941(d)(1) (2009). “Disqualified person” as defined by 26 IRC § 4946(a), is a person who is a substantial

contributor to the foundation; is a foundation manager; is an owner of more than 20% of the total combined voting power of a corporation, the profits interest of a partnership, or the beneficial interest of a trust or unincorporated enterprise, which is a substantial contributor to the foundation; a member of the family (spouse, ancestors, children, grandchildren, great grandchildren, and their spouses); a corporation, partnership, or trust of which the persons described above own more than 35% of the total combined voting power; a private foundation effectively controlled by the same person(s) who control the private foundation, or substantially all of the contributions to which were made by the same person(s) above, or members of their families who made substantially all the contributions to the private foundation in question; or a government official. (26 IRC § 4946(1) (2009)).

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Trustees must not keep “excess business holdings”, defined as the amount of stock or other interest in the enterprise which the foundation would have to dispose of to a person other than a disqualified person in order for the remaining holdings of the foundation in such enterprise to be permitted holdings. See 26 IRC § 4943(c)(1) (2009). (Certain exceptions apply.)

Trustees must not make investments that would jeopardize the carrying out of any of the exempt purposes of the trust, so as to give rise to liability for the tax imposed by 4944(a), which is 10% of the amount invested for each year in the taxable period to be paid by the private foundation. See Minn. Stat. § 501B.32 Subd. 1(d) (2009); 26 IRC § 4944(a)(1) (2009).

Trustees shall not make a “taxable expenditure”, defined as an amount paid or incurred to carry on propaganda, or otherwise to attempt to influence legislation, to influence the outcome of any specific public election, that would give rise to liability for the tax imposed by 4945(a). See 26 IRC § 4945(d) (2009).

The above rules not apply to the extent that a court of competent jurisdiction determines that application would be contrary to the terms of the will, trust instrument, or other governing instrument and that the will, trust instrument, or other governing instrument may not be changed to conform to these rules.

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On August 1, 2008, Minnesota adopted the Uniform Prudent Management of Institutional Funds Act ("UPMIFA"), which affects trustee decisions and actions taken on and after that date.  UPMIFA applies to a trust that had both charitable and noncharitable interests, after all noncharitable interests have terminated. See Minn. Stat. § 309.735(4).

The UPMIFA instituted new standards of conduct for charitable or government entities, trusts and other entities, or those managing and investing an institutional fund.  In complying with the duty of loyalty, such institutions are responsible for managing and investing in good faith and "with the care an ordinarily prudent person in a like position would exercise under similar circumstances".  See Minn. Stat. § 309.74(b) (2009).

If a trustee is selected because he or she has special skills or expertise, or is selected in reliance upon that person's representation that her or she has special skills or expertise, has a duty to use those skills or expertise in managing and investing institutional funds. Id. at (e)(6).

Under the same statute, the trust or other managing entity may incur only costs that are appropriate and reasonable in relation to the assets, the purposes of the institution, and the skills available to the institution.   It must make a reasonable effort to verify facts relevant to the management and investment of the fund. Id. at (c). However, institutional funds may be pooled for management and investment reasons. Id. at (d).

Decisions about trust assets are not made individually, but rather in context of the portfolio of investments as a whole and part of an overall strategy, having risk and return objectives reasonably suited to the fund and to the institution. Id. at (c)(2). Diversification is required unless reasonably determined under special circumstances that the purposes of the fund are better served otherwise. Id. at (c)(4).

There is also a time constraint placed on receipt of assets and property, requiring decisions to be made “within a reasonable time” in order to rebalance the portfolio or comply with institutional requirements. Id. at (c)(5).

Compliance with these factors, among others, is determined by facts and circumstances at the time of decision, and not in hindsight. See Minn. Stat. § 309.76 (2009).

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Power to Change Charities Discretion Regarding Distributions Modification of Trust

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If the court determines that the purpose and object of the donor's charity are imperfectly expressed, the method of administration is incomplete or imperfect, or circumstances have so changed since the execution of the instrument creating the trust as to render impracticable, inexpedient, or impossible a literal compliance with the terms of the instrument, the court may, upon the petition of the trustee, make an order directing that the trust must be administered or expended in a manner the court determines will, as nearly as possible, accomplish the general purposes of the instrument and the object and intention of the donor without regard to, and free from any specific restriction, limitation, or direction it contains. See Minn. Stat. § 501B.31  

In re Ruth Easton Fund, 680 N.W.2d 541 (Minn. App. 2004). Donor created a charitable trust fund to benefit the Ordway Theater with the intent of funding new full-length theatrical works. The trustees had suspended distributions on the grounds that the Ordway was no longer producing new works. In addition, the trustees were requesting authorization to modify the trust in order to distribute the trust income and principal to charitable organizations they thought were in accordance with the grantor’s intentions. The trustees’ decision to suspend the funding was subject to an abuse of discretion standard. As long as the trustees act in good faith, from proper motives, and within the bounds of reasonable judgment, the court will not interfere. The court found that the trustees’ suspension of distributions was valid. However, the court refused to allow the trust to be modified under the doctrine of cy pres because literal compliance with the terms of the instrument was not shown to be impracticable, inexpedient, or impossible. In other words, the trustees has not shown that the Ordway would never fund new works in the future.

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Marketable Securities Closely-held Stock and Stock Options

Avoid pre-arranged, legally binding plan to redeem closely-held stock from trust

Concern about unrelated business taxable income (UBTI)

Real Estate Debt-encumbered property may cause disqualification

of CRT or unintended income tax consequences to Donor and charity

Concern about environmental risks, title issues, property management

IRA Assets Insurance Art

Artwork and copyright (right to make reproductions and exploit commercially) must be transferred to trust

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Charitable trusts are supervised, administered and enforced by the Minnesota Attorney General. The Attorney General has common law and statutory rights, duties and powers to enforce charitable trusts, including the rights, duties, and powers specifically listed under Minnesota Statutes §§ 501B.33-45, the Supervision of Charitable Trusts and Trustees Act.

If a trustee of a charitable trust violates any of the charitable trust statutes, the Attorney General may institute the appropriate proceedings to force trustee compliance with the statutes, and to ensure proper administration of the charitable trust. See Minn. Stat. § 501B.41 Subd. 1 (2009).

Even if the trust instrument contains contrary provisions to §§ 501B.33-45, the statutes still apply. Id. at Subd. 6.

If the trustee fails to follow the required formalities of a charitable trust, the failure will constitute a breach of trust. See Minn. Stat. § 501B.42 (2009). The Attorney General may then institute a civil action against the trustee to remedy the breach of trust. The Attorney General may ask for: injunctive relief against the breach of trust or threatened breach of trust; the removal of a trustee who has committed or is committing a breach of trust; the recovery of damages; and another appropriate remedy.Id. at Subd. 7

The court may order the trustee to pay the reasonable expenses incurred in the action, including attorneys’ fees, when the trustee has been found guilty of an intentional or grossly negligent breach of trust. Minn. Stat. § 501B.43 Subd. 1 (2009). However, any money received by the Attorney General from a suit against a trustee is returned to the state treasury. Id. at Subd. 2.

Trustee serving without compensation is protected by Minn. Stat. § 317A.257 and is not civilly liable for an act or omission by that person if the act or omission was in good faith, was within the scope of the person's responsibilities as a trustee and did not constitute willful or reckless misconduct.

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Removal of Trustee Nontrustee Donor can retain power to change charitable remainder beneficiaries of a CRT

and appoint and remove trustees. See Rev. Rul. 76-8, 1976-1 C.B. 179. Nontrustee Donor should not retain the power to change charitable lead beneficiaries of CLT but may have power to appoint and remove trustees if they are not related or subordinate. See Rev. Rul. 95-58, 1995-2 C.B. 191.

The court may remove a trustee for cause; or if the court finds that removal of the trustee best serves the interests of all of the beneficiaries, is not inconsistent with a material purpose of the trust, and one or more of the following elements is found: the trustee has committed a serious breach of trust; lack of cooperation among cotrustees substantially impairs the administration of the trust; the unfitness, unwillingness, or persistent failure of the trustee to administer the trust effectively; there has been a substantial change of circumstances; or removal is requested by all of the beneficiaries not under disability who, on the date the petition is

signed, either are current permissible distributees of trust income or principal, or would be permissible distributees of trust income or principal if the trust terminated on that date.

Minn. Stat. § 501B.16 (9).

Appointment of Successor Trustee If the terms of a trust do not effectively provide for the appointment of a successor trustee

and appointment of a successor is required, or if title to the trust assets does not vest in a successor trustee, the district court may appoint a successor trustee or vest title in a successor trustee. Minn. Stat. § 501B.08.

Whenever the district court appoints a successor trustee, it is presumed that a corporate trustee must be replaced by another corporate trustee unless the court finds it would best serve the interests of all the beneficiaries and is not inconsistent with a material purpose of the trust to not appoint a corporate trustee. Id.

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When in doubt, the trustee of charitable trust should seek a Court Order and notify the Attorney General

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