Key point 6-07.05. Church board members may be personally liable for diverting designated funds or trust funds to some other purpose.
* A New York court ruled that a scholarship trust for the benefit of students at a church-affiliated school could not be diverted to a college not affiliated with the church. In 1969 the "Mary Russell Memorial Scholarship Fund" was created to provide scholarships to students at a women’s school operated by an Episcopal Diocese in New York. Most of the contributions that funded the trust came from public gifts. The trust was named after a former dean of the school. By 1991, the school had incurred substantial debt, and it was announced that the school was closing. In 1995, the trustees of the trust asked a court for an order permitting the distribution of the remaining trust funds ($65,000) to Mt. Holyoke College, the alma mater of Mary Russell. The trustees, being of advanced age, wanted to terminate the trust rather than continue it with a modest sum. They contended that the college was an appropriate beneficiary because Mary Russell was committed to advancing the education of women. The court disagreed. It acknowledged that under the "cy pres" doctrine, if the purpose of a charitable trust becomes impossible or impractical, a court can order that the trust assets be diverted to another charitable purpose "falling within" the purposes of the settlor (creator) of the original trust. This requirement was not met, the court concluded, by transferring the Mary Russell Scholarship Fund to Mt. Holyoke College. It observed, "The charitable gifts under this trust had several components: (1) to promote the education, (2) of female students, (3) at an institution affiliated with the Episcopal Church. In applying cy pres the court should attempt to satisfy all components. The proposed gift to Mt. Holyoke College does not achieve that result." The court directed the trustees to submit an alternative proposal for selection of a beneficiary.
Application. It is common for donors to establish trusts for the benefit of a specific school or church. This case illustrates an important point—school or church leaders should not divert the assets of such trusts to some other institution or purpose without first consulting with an attorney to be sure that the diversion is legally appropriate and will not be successfully challenged. In the matter of Mary Holbrook Russell Memorial Scholarship Fund, 730 N.Y.S.2d 702 (N.Y. Sur. 2001).
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