• Key point: Funds established to assist a medically needy person should not necessarily be distributed to the needy person’s family in the event of his or her death.
• How should the balance of a fund created to assist a cancer victim be distributed in the event of her death? That was the issue faced by a New Jersey appeals court. A woman was diagnosed as suffering from acute leukemia. After chemotherapy proved unsuccessful in treating the disease, her physicians recommended a bone marrow transplant. The woman’s health insurance company refused to pay for the transplant on the ground that it was an experimental procedure. The woman’s family launched a fund-raising campaign in their community, seeking private donations to defray the anticipated costs of the transplant. Their efforts included advertisements in newspapers urging readers to mail contributions to a fund established in the woman’s name at a local bank. Nearly $21,000 was raised through these efforts. Unfortunately, the woman died before the transplant could be performed. The fund had a balance of nearly $8,000 at the time of the woman’s death. A dispute arose as to the proper distribution of this fund balance. Family members claimed that the fund balance should be distributed to them on the basis of the “cy pres” doctrine. The cy pres doctrine provides that if a donor creates a charitable trust for a specified purpose, and the purpose of that trust becomes impossible or impracticable, then a court may order a distribution of the fund to a similar charitable purpose. The bank claimed that the cy pres doctrine compelled the distribution of the fund balance to the National Leukemia Foundation. A court concluded that the cy pres doctrine did not apply in this case, and accordingly it rejected the positions of both the family and the bank. The court noted that the cy pres doctrine only applies to charitable trusts, and that a charitable trust is one that is devoted to the benefit of the community rather than to a particular individual or small group. Since the trust in this case was designed to defray the medical expenses of one person, it was a private trust rather than a charitable trust. As a result, the cy pres doctrine did not apply. How then should the trust balance be distributed? The court acknowledged that this was an issue that “surprisingly has not been addressed” by any previous case in New Jersey. The family members again insisted that the fund balance should be distributed to them, and they based their position on affidavits signed by several donors to the fund stating that had they known the leukemia victim would die before the bone marrow transplant they would have wanted the fund balance distributed to the woman’s family. The court was unpersuaded. It observed:
[A]lthough records were maintained as to donations received by the fund, which identified some of the contributors, there were numerous anonymous donations. So too, the passage of time may create administrative difficulties in locating the present whereabouts of some contributors whose identities were known …. Research has not revealed any specific authority governing the distribution on a pro-rata basis of trust funds where the identity of the original donors cannot be ascertained. However [a 1958 English case] is helpful. In [the English case] the court ordered a judicial inquiry be conducted to determine the identity of anonymous donors whose addresses have changed. Without any other relevant precedent, this court will adopt this novel, but practical approach.
To accomplish this inquiry, the court directs the [bank] to compile a list of all donors and the last known addresses of each donor. A written inquiry shall be directed to each donor verifying the accuracy of the address and original contribution. Thereafter, the names of donors, and last known addresses who do not respond to the written inquiry, together with a general announcement to anonymous donors, shall be published in [the local newspaper]. At the completion of this inquiry, under court supervision, the funds shall be paid on a pro-rata basis to the identified donors. The balance of the fund, constituting the pro-rata share of all unidentified donors shall be payable into the court. At the conclusion of six months from the date of advertisement, all claims by unidentified donors shall be barred and the then existing balance will again be distributed on a pro-rata basis among the same group of identified donors who received the initial distribution.
This ruling will be relevant to any church that has created a fund for the benefit of a specified individual or family (ordinarily for benevolent or charitable purposes). The important point is this—when the purpose of the fund no longer exists, then any fund balance should not necessarily be distributed to family members. According to the New Jersey court, the cy pres doctrine will not apply in such cases, and accordingly the church should attempt to identify individual donors to the fund and return to them a pro-rata share of their contributions. For example, if half of the fund balance remains, then individual donors should be refunded half of their contributions. Of course, donors are free to decline a refund of their contribution and redirect it to some other charitable or religious purpose. This raises another question that was not addressed by the court—are donations to such a fund tax-deductible as charitable contributions? This is an issue that neither the IRS nor any court has addressed directly. However, the fact that this court concluded that a trust established for the health expenses of a cancer victim was a private rather than a charitable trust suggests that contributions to such a trust are not deductible as charitable contributions. On the other hand, there are arguments that would support the deductibility of such contributions in some cases. Note, however, that donors who claim a deduction for their contributions to such a fund will need to file an amended tax return if they deducted the full amount of their contribution as a charitable contribution and they request a pro-rata refund of their contributions. This complication will induce many donors to simply redesignate their contribution to some other charitable or religious purpose. Matter of Gonzalez, 621 A.2d 94 (N.J. Super. Ch. 1992).
© Copyright 1993, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m08 m18 c0493
