Key Point 6-07.05. Church board members may be personally liable for diverting designated funds or trust funds to some other purpose.

The Alabama Supreme Court ruled that a church lacked the legal authority to enforce a charitable trust in which it was named as a potential beneficiary. A decedent died in 1950, leaving a will which created a trust providing for the distribution of income to unnamed charitable, educational, and religious entities, in the trustee’s discretion. A church and school sued the trustees on behalf of the class of all potential trust beneficiaries in an attempt to compel them to make distributions.

The court concluded that “identifiable and actual beneficiaries” of charitable trusts have a sufficient special interest in the enforcement of the trust that they can sue to enforce the trust terms. But in this case, the beneficiaries were merely potential beneficiaries and, as such, “did not have the sufficient special interest in the enforcement of the trust to entitle them to bring suit. Indeed, as the trustees argue, “the difference in status between a person or entity that has a vested or fixed right to receive a benefit from a charitable trust and a person or entity that might merely potentially receive a benefit in the discretion of the trustees, is at the very heart of the distinction between one who has a ‘special interest’ and, thus, standing to sue, and one who does not.” The court noted that “other courts, also applying the special-interest rule, have held that mere potential beneficiaries, whose interest is no greater than the interest of all the other members of a large class of potential beneficiaries of a charitable trust, have no standing to maintain an action for the enforcement of the trust.”

The court concluded that “we do not mean to imply that a potential beneficiary of a charitable trust can never avail himself of legal process to enforce the provisions of such a trust. In the absence of a showing of special interest, however, a party seeking enforcement of a charitable trust should have the Attorney General commence an action when it appears that the trust is being mismanaged through negligence or fraud.” Rhone v. Adams, 2007 WL 2966822 (Ala. 2007).

Resource. The related issue of the enforceability of designated gifts to churches and other charities is addressed in chapter 8 of Richard Hammar’s annual Church & Clergy Tax Guide, available from publisher of this newsletter by calling 1-800-222-1840.

This Recent Development first appeared in Church Law & Tax Report, November/December 2008.