Fiduciary Duties in Church Leadership: What They Are and Why They Matter
Why It Matters
Many church officers and directors—often board or finance committee members—don’t fully understand the concept of fiduciary duty. This misunderstanding can lead to legal exposure and financial loss for both the church and its leaders.
What’s at Stake
Failing to meet fiduciary obligations can result in:
- Significant financial damage to the church
- Personal legal liability for board members
- Erosion of trust within the congregation
The Purpose of This Guide
This article explains:
- What fiduciary duties are and where they come from
- How they apply to church leaders
- Best practices based on nonprofit law
- Legal cases that show real-world consequences
- How federal tax laws shape fiduciary responsibility
Understanding Fiduciary Duties
Origin and Legal Foundation
The term fiduciary comes from the Latin fiduciarius, meaning something held in trust. Legally, a fiduciary is someone entrusted with managing another’s money, property, or affairs with honesty and care.
“A fiduciary is someone who acts in a role of trust for the benefit of another, implying great confidence and requiring good faith.”
— In re Benites, 2012 WL 4793469 (N.D. Tex. 2012)
Courts have affirmed that nonprofit board members are fiduciaries. They are expected to exercise good judgment and act in the best interest of the organization they serve.
“Officers and directors are bound to the exercise of the utmost good faith, loyalty, and honesty.”
— Summers v. Cherokee Children & Family Services, Inc., 112 S.W.3d 486 (Tenn. App. 2002)
The U.S. Supreme Court emphasized:
“To say that a man is a fiduciary only begins analysis.”
— SEC v. Chenery Corp., 318 U.S. 80 (1942)
The Four Fiduciary Duties
Nonprofit board members typically have four main fiduciary duties:
- Due Care
- Prudent Investing
- Loyalty
- Obedience
Each will be examined in detail.
Duty of Due Care
What It Means
Church officers and directors must act with care, diligence, and attention. They are expected to:
- Stay informed about the church’s operations
- Regularly attend meetings
- Evaluate financial and legal decisions thoughtfully
“Total abdication of [a director’s] supervisory role is improper.”
— Stern v. Lucy Webb Hayes National Training School, 381 F. Supp. 1003 (D.D.C. 1974)
Legal Examples
Stern v. Lucy Webb Hayes: A board failed to meet for over a decade. The court ruled this was a breach of due care.
PTL Bankruptcy Case: Jim Bakker was found to have breached his duty by:
- Failing to inform the board of financial issues
- Failing to supervise spending
- Engaging in self-dealing
“Bakker exercised a great deal of control over his board … this was gross mismanagement.”
Best Practices for Church Boards
- Read and understand financial reports
- Ask questions and demand transparency
- Attend board meetings consistently
- Supervise delegated tasks
- Prevent conflicts of interest
Learn from For-Profit Boards
Many corporate cases offer valuable guidance:
- Jurista v. Amerinox: Boards must have systems to monitor decisions.
- Francis v. United Jersey Bank: Directors can’t claim ignorance.
- Barr v. Wackman: A board is not a symbolic entity—it must function.
Practical Safeguards
To meet the duty of due care:
- Check your state nonprofit laws.
- Follow any investment restrictions in bylaws or meeting minutes.
- Use an investment committee with financial experts.
- Create and follow a formal investment policy.
- Avoid risky or speculative investments.
- Ensure regular review of church investments.
- Avoid conflicts of interest.
- Be cautious of scams, particularly online.
- Diversify investments.
- Treat donated funds with added moral and legal care.
Prudent Investor Rule
How It Applies
The duty of due care includes managing investments wisely. Courts understand that not every investment will succeed. The key question is: Did the board act as a prudent person would?
“Absent abuse of discretion, business judgment will be respected.”
Key Guidelines
- Document investment decisions
- Seek expert advice when necessary
- Diversify to reduce risk
- Avoid conflicts of interest
- Reassess investments regularly
Common Scams to Avoid (per SEC)
- Pyramid schemes
- Ponzi schemes
- Nigerian investment scams
- Prime bank scams
Warning signs include:
- Unrealistic returns
- Secretive or exclusive opportunities
- Confusing jargon
- Guaranteed results
Key point: Do not rely on “experts” associated with the investment. Use independent, trusted advisors.
Duty of Loyalty
What It Means
This duty requires acting in the church’s best interest, not personal interest.
Examples of Loyalty Violations:
- Self-dealing in church contracts
- Usurping opportunities intended for the church
- Failing to disclose conflicts of interest
“The rule demands undivided and unselfish loyalty to the corporation.”
— Guth v. Loft, Inc., 5 A.2d 503 (Del. 1939)
Real-World Example: Jack’s Secret Church
- Jack, a church officer, secretly formed a new church
- He transferred church property without disclosure
- The court ruled he breached his fiduciary duty of loyalty
Lessons for Church Boards
- Disclose conflicts of interest fully
- Recuse yourself from votes where you have a personal stake
- Don’t personally benefit from church opportunities
Business Case Examples
- Jurista v. Amerinox: Conflicts of interest void business judgment protection
- MF Global Holdings: Loyalty includes avoiding even the appearance of personal gain
Duty of Obedience
What It Means
Board members must ensure the church operates within:
- Its mission and purpose
- Its governing documents (e.g., bylaws, articles)
- State and federal laws
“The duty of obedience requires fidelity to the mission.”
— Manhattan Eye, Ear & Throat Hosp. v. Spitzer, 715 N.Y.S.2d 575 (N.Y. Sup. 1999)
Example
A Texas court ruled directors must not act outside the powers granted by law or the church’s charter.
— Batey v. Droluk, 2014 WL 1408115 (Tex. App. 2014)
Federal Tax Law Impacts
Excess Benefit Transactions
Section 4958 of the tax code allows the IRS to impose excise taxes for:
- Unreasonable compensation
- Improper benefits to insiders (e.g., board members, relatives)
Key Definitions
- Disqualified person: Typically, someone with substantial influence over the organization
- Excess benefit: Anything given in excess of fair market value for services
Consequences
- 25% excise tax (plus 200% if not corrected)
- 10% tax on managers who approve such benefits
- Risk to tax-exempt status
Compensation is presumed reasonable if approved by an independent body using comparability data.
Additional Tax Triggers
- Failure to report payroll taxes (IRC § 6672)
- Providing personal benefits to board members or staff
Key point: Tax law is increasingly used to enforce fiduciary standards.
Additional Legal Guidance
The Uniform Prudent Management of Institutional Funds Act (UPMIFA)
UPMIFA, adopted in 47 states, sets standards for:
- Prudent investing
- Risk diversification
- Minimizing costs
- Acting in good faith
It applies to nearly all church funds, not just trusts or endowments.
Key Responsibilities Under UPMIFA
- Align investment decisions with the church’s mission
- Diversify unless special circumstances warrant otherwise
- Monitor and evaluate assets regularly
- Use advisors when appropriate
- Disclose material information to other board members
Protecting Your Leaders—and Your Church
Church officers and directors are often volunteers. Still, they shoulder serious responsibilities. A failure to understand or fulfill fiduciary duties can:
- Jeopardize the church’s legal standing
- Invite lawsuits or IRS scrutiny
- Damage morale and trust
Best Practices
- Provide regular training on fiduciary responsibilities
- Use experts (legal, financial) to advise on high-risk matters
- Review and update policies regularly
- Document decisions and rationales clearly
- Audit financials and conflicts of interest
“A director is not an ornament. The law has no place for dummy directors.”
— Francis v. United Jersey Bank, 432 A.2d 814 (N.J. 1981)
Final Word: Invest in Education
Educating board members about fiduciary duties isn’t optional—it’s essential. Every church deserves leaders who understand:
- The weight of their responsibilities
- The real risks of inaction or oversight
- The legal and moral expectations tied to their role
By investing in your leaders, you’re investing in the church’s future.
“No one is compelled to be a director, but once the office is assumed, it carries with it the light burden of active, diligent, and single-eyed service.”
— People v. Marcus, 261 N.Y. 268 (1933)
