When Should a Nonprofit Be Organized as a Trust?

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The world of trusts is quite confusing, with elaborate tax rules and a complicated mix of specialized terminology. Despite their relative complexity when compared to other forms available to nonprofits, like corporations or associations, trusts can be worth a look for some types of organizations.

Broadly speaking, a trust is a special kind of legal entity that is established under state law with a considerable dose of federal tax law thrown in. For individuals, the goal of a trust typically is to minimize taxes, both during the lifetime of the person creating the trust (the “settlor” or “grantor”) and afterward. Trusts come in many forms: they may be revocable or irrevocable, they may provide for income streams to living beneficiaries, they may designate their assets to certain uses, and so forth. For example, a charitable trust allows an individual to designate assets to be given to a charity at the end of the trust’s term, while allowing the individual (or another beneficiary) to receive the income from those assets (rents, dividends, and so on) in the interim, all with significant tax savings.

An organization that wants to operate as a tax-exempt nonprofit can organize itself as a trust as well. Trusts operated this way are called private foundations. (Note that foundations can also be corporations.) A feature of private foundations that distinguishes them from charitable trusts is that they can have more than one funding source. Private foundations set up as trusts can be organizationally similar to other kinds of entities: they can have a board of directors, officers, mission statements, and so forth. The grantor(s) of a private foundation can designate the charitable beneficiaries of the foundation in its founding documents, or can provide it with a more general charitable direction.

Private foundations may be operating or non-operating. A non-operating foundation simply exists to distribute its income and principle assets to other charitable organizations. An operating foundation, on the other hand, gets directly involved in furthering a charitable goal. Both kinds of foundation can have directors, officers, and employees, but an operating foundation typically is a much more complex organization because it needs mechanisms for doing charitable work itself. Nonprofit colleges are a good example of organizations that are often structured as operating private foundations.

Whether a trust is the right form for a particular nonprofit’s mission and its founders’ goals depends on a range of complex factors. The best course of action for anyone who is considering establishing a trust is to get professional advice. The Church Law Center of California provides governance and structuring advice to religious and secular nonprofits. We can help your organization evaluate the merits of different structures to determine which one is the best fit. Call us today at (949) 689-0437 or reach out to us through our contact page.

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