Charitable Trust

What is the Charitable Trust Doctrine?

Despite its name, the charitable trust doctrine applies to certain nonprofit corporations as well as trusts. Under the doctrine, all the assets of a nonprofit corporation exist within a charitable trust and these assets must be used only for the charitable purposes articulated in the nonprofit’s articles of incorporation. The charitable trust doctrine requires that a corporation’s assets, including donations, gifts, and all revenues generated by the organization, be used to fulfill its charitable activities. These restrictions continue even if the corporation later changes its purposes, dissolves and distributes its assets, or transfers its assets to another organization. The charitable assets must continue to be devoted to the original charitable purposes. A nonprofit corporation can change its purposes, but the change does not extinguish the charitable obligations. A simple, shorthand way to understand the concept is: “once a charitable dollar, always a charitable dollar.”

In almost every state, the charitable trust doctrine is well established by either statute (law passed by the legislature) or common law (law developed by courts). Some states have specific statutes governing charitable trusts. For example, a Connecticut statute states that “[a]ny charitable trust….shall forever remain to the uses and purposes to which it has been granted according to the true intent and meaning of the grantor and to no other use.”

More Information about the Charitable Trust Doctrine

Keeping the Trust: Holding Nonprofit Hospitals to Their Charitable Missions (PDF)

In 2003, the South Dakota Supreme Court issued a landmark charitable trust decision in the case of Banner Health System v. Lawrence E. Long, 663 N.W.2d 242 (2003) (PDF). This case sets several important, consumer-friendly precedents in the area of charitable trust law.

The South Dakota court explicitly held that the assets of a nonprofit health care corporation, as well as the proceeds from the sale of those assets, are subject to the law of charitable trust. It also held that an out of state nonprofit corporation must leave the proceeds of a hospital sale with the local community upon divestiture, even if the community hospital remains a nonprofit after the sale.

For a summary of the Banner case, read “You Can’t Take the Money and Run: Court Prohibits Nonprofit Hospital Chair from Removing Community Assets” (PDF) Consumers Union wrote an Amicus Brief for the Banner case, (PDF) which can be read here.