When you give to a nonprofit for the purpose of continuing its good work, especially as part of your estate plan, how do you know it will be used as you intended?
Nonprofits are set up for doing a specific type of work that’s not available to anyone otherwise. Many are run by religious organizations, but others are set up by individuals to fill a need that isn’t being met elsewhere. Transferring money and/or property into a charitable trust helps keep the nonprofit running so that they continue to do the work they set out to do.
What It Says
A nonprofit’s bylaws state and indicate the organization’s mission, mission statement, and other operational rules.
The Charitable Trust Doctrine requires that a gift that an organization accepts must be used by the organization for the continuation of their stated mission. The gift can’t be used for anything that isn’t related to the organization’s core mission, even if that mission changes, dissolves, or the organization transfers gifted assets.
The Doctrine also requires that any revenues generated by the nonprofit are also required to be used on its core mission, since separating contributions from revenue may be difficult. Revenue is also the result of using the donations and contributions toward the mission.
It’s important to ensure that the nonprofit is operating within its articles of incorporation and according to the bylaws, and not outside of them. Should the nonprofit’s purpose be limited to a very specific, limited purpose or confined to a geographical area, it may be time to consider amending the purpose. However, assets that are acquired prior to the amendment might only be applied to the pre-amendment purpose.
The Cy Pres Doctrine
If a nonprofit is no longer able to carry out its original mission, the court will transfer the property or a portion thereof to another charitable purpose that is reasonably approximate to the original charity’s purpose. This is usually done to save a charity from failing, but there are times when the original purpose is no longer possible to attain. For instance, if a testator who wished for the original purpose dies, and the purpose offered no other true charitable benefits, most courts apply the notion that the testator would prefer to see the trust fail if the purpose becomes an impossibility.
Literally, Cy Pres means “as near as possible.” The new charity that receives the transferred property must be “as near as possible” to the original charity and its original purpose. In other words, if the original charity goes bankrupt and will no longer exist, because the work they performed is no longer needed or has become impossible, impractical or illegal, the money and/or property must be transferred to another charity whose work is very similar to that of the original charity.
In Illinois, courts will apply the Cy Press doctrine to prevent a charity testamentary trust from failure when the donor intended to benefit general charity, not a specific institution. With this stated intent, the IRS will require the trust to have a dissolution provision in the trust instrument to satisfy Reg. 1.501(c)(3)-1(b)(4).
The IRS has a six-page document explaining Cy Pres, and offers a factual example of how this doctrine works in a real-life case.
Choosing an Illinois Nonprofit Attorney
James C. Provenza is a leading Illinois non-profit attorney with years of experience navigating the complex legal landscape surrounding charity and nonprofit organizations and the issues they face. He is also one of the Chicago’s foremost estate planning lawyers. Call our firm today at (847) 729-3939, or use our online contact form. Let us work with you to start your charity or Chicago nonprofit organization, and ensure its legal compliance.