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Trusts • Charitable and Honorary Trusts
TRUSTS#010
Legal Definition
A charitable trust, which is created in the same manner as a private express trust, requires the purpose to benefit the public, and an indefinite number of beneficiaries. If the effect of a trust is charitable and of benefit to the public, that is sufficient.
Plain English Explanation
A charitable trust is a special type of trust designed to provide a public benefit, rather than benefit specific individuals. While a regular private trust is formed to give property or assets to particular people, a charitable trust is meant to help the community in some way.
For example, a charitable trust could be set up to fund medical research, provide scholarships, support animal welfare, help the poor, or any other charitable cause. As long as the purpose benefits a large segment of the public in some way, it can qualify as a charitable trust.
Charitable trusts are formed much like private trusts, with a settlor providing the initial assets, one or more trustees to manage the assets, and charitable beneficiaries. But unlike a private trust, the beneficiaries of a charitable trust are undefined - they are whichever members of the public who stand to benefit from the charitable work.
The law supports and encourages charitable trusts because they provide public goods that government and private individuals may not fully fund on their own. By offering tax incentives for charitable trusts, the law helps facilitate private funding for socially beneficial causes.
For example, a charitable trust could be set up to fund medical research, provide scholarships, support animal welfare, help the poor, or any other charitable cause. As long as the purpose benefits a large segment of the public in some way, it can qualify as a charitable trust.
Charitable trusts are formed much like private trusts, with a settlor providing the initial assets, one or more trustees to manage the assets, and charitable beneficiaries. But unlike a private trust, the beneficiaries of a charitable trust are undefined - they are whichever members of the public who stand to benefit from the charitable work.
The law supports and encourages charitable trusts because they provide public goods that government and private individuals may not fully fund on their own. By offering tax incentives for charitable trusts, the law helps facilitate private funding for socially beneficial causes.
Hypothetical
Hypo 1: Sam sets up a trust with $1 million, naming Bob as the trustee and specifying that the trust assets should be used to fund cancer research. There are no named beneficiaries. Result: This is a valid charitable trust because funding cancer research benefits the general public, and the beneficiaries are unspecified members of the public who stand to benefit from cancer research.
Hypo 2: Bob creates a trust, funded with $500,000, for the purpose of providing college scholarships to underprivileged students. Bob names Sam as the trustee and states the money should be distributed to individual students as Sam sees fit. Result: This is a valid charitable trust because providing scholarships benefits a large segment of the public. The unspecified student beneficiaries who receive the scholarships can change over time.
Hypo 3: Sam establishes a trust with $50,000. Sam names Bob as the trustee, stating the money should be used to buy toys for children at Hypo Orphanage during the holidays every year. Result: This is a valid charitable trust because buying toys for orphans provides a public benefit, even though the beneficiaries are more narrowly defined as orphans at a certain orphanage. As long as the class of beneficiaries is indefinite, it satisfies the requirements for a charitable trust.
Hypo 4: Bob creates a trust to provide annual income to his friend Sam. Bob names Sam as the beneficiary and trustee. Result: This is not a valid charitable trust because Sam is the sole, named beneficiary. There is no public benefit, so the requirements for a charitable trust are not met. This is a private trust.
Hypo 2: Bob creates a trust, funded with $500,000, for the purpose of providing college scholarships to underprivileged students. Bob names Sam as the trustee and states the money should be distributed to individual students as Sam sees fit. Result: This is a valid charitable trust because providing scholarships benefits a large segment of the public. The unspecified student beneficiaries who receive the scholarships can change over time.
Hypo 3: Sam establishes a trust with $50,000. Sam names Bob as the trustee, stating the money should be used to buy toys for children at Hypo Orphanage during the holidays every year. Result: This is a valid charitable trust because buying toys for orphans provides a public benefit, even though the beneficiaries are more narrowly defined as orphans at a certain orphanage. As long as the class of beneficiaries is indefinite, it satisfies the requirements for a charitable trust.
Hypo 4: Bob creates a trust to provide annual income to his friend Sam. Bob names Sam as the beneficiary and trustee. Result: This is not a valid charitable trust because Sam is the sole, named beneficiary. There is no public benefit, so the requirements for a charitable trust are not met. This is a private trust.
