Restrictive Provision in Churches’ Charitable Trust Can Be Expanded to Allow Additional Investments

Case demonstrates that the low rates of return on such investments may enable churches to obtain a court order authorizing a broader range of investment options.

Key point 6-07.03.
Church board members have a fiduciary duty to use reasonable care in the discharge of their duties, and they may be personally liable for damages resulting from their failure to do so.

A New York appeals court ruled that a provision in a charitable trust for the benefit of three churches that restricted investment of trust funds to insured bank accounts and government securities could be expanded to allow other investments offering the potential for a greater rate of return.

A church member died in 1999, and his will made bequests to, among many others, three churches in the amounts of $217,000; $460,000; and $260,000. The will directed each church to hold the funds in trust, invest only in insured bank accounts and government securities, and use the net income for maintenance of the physical property of each church. Because the return on investments in insured bank accounts and government securities has been so low for many years, the churches asked a court to amend the current investment restrictions and authorize them to invest in accordance with the Prudent Investor Act, which would allow investment in stocks and bonds. A trial court denied the churches' request, and the churches appealed.

An appeals court noted that a state law provides that "whenever it appears to [a court] that circumstances have so changed since the execution of an instrument making a disposition for religious … purposes as to render impracticable or impossible a literal compliance with the terms of such disposition, the court may, on application … make an order or decree directing that such disposition be administered and applied in such a manner as in the judgment of the court will most effectively accomplish its general purposes, free from any specific restriction, limitation or direction contained therein."

In this case, the court noted, the decedent's intent was to provide each church with a principal amount of money from which funds would be generated to assist in the maintenance costs of the physical property of each. The churches sought "limited additional authority regarding the manner in which investments of the principal are administered." They "do not seek to alter the specific charitable purpose or disposition provisions." The court concluded:

[The churches] established that the current investment restrictions have for many consecutive years reduced the income from each trust to essentially negligible amounts. Those restrictions have become impracticable and frustrate each trust's purpose of generating funds to assist in church maintenance. Under analogous circumstances, courts have cautiously exercised their equitable power to permit deviation of investment restrictions … . We deem such relief appropriate here.

What this means for churches

Many church members have left funds in a trust for the perpetual benefit of their church. It is not uncommon for such trusts to restrict investments of trust principal to federally insured bank accounts or government-issued securities. This case demonstrates that the low rates of return on such investments may enable churches to obtain a court order authorizing a broader range of investment options. In some cases, like this one, a court will simply require a church trustee to invest trust funds consistently with the "prudent investor rule."

This rule is recognized in every state, with some variations. According to a commonly cited definition, "trustees must be prudent and vigilant and exercise a sound judgment. They are to observe how persons of prudence, discretion, and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income as well as probable safety of the capital to be invested." In re Estate of Chamberlin, 135 A.D.3d 1052 (N.Y. App. 2016).

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