Prudent Charitable Trustees

Prudent trustee obligations

In Re Mulligan (Deceased) [1998] 1 NZLR 481 a trustee company, along with the executors of a widow trustee’s estate, were held liable for the financial consequences of failing to preserve the capital value of the testator’s estate and ordered to pay the estate’s residuary beneficiaries the estimated losses:

The testator died in 1949 leaving his widow a substantial legacy and a life interest in a farm with nephews and nieces as residual beneficiaries.  The trustees of the estate were a trustee company and the widow.  The farm was sold in 1965 and the estate invested in fixed-interest securities until the widow died in 1990.  Between 1965 and 1990 different trust company officers tried to persuade the widow to invest shares to counter inflation but she adamantly refused to agree or allow direct contact with beneficiaries by the trust company.  The widow bought a rental property in 1965, her own home with a rental flat in 1972 and (unknown to the trust company) owned significantly valuable shares.  At the widow’s death, the capital of the testator’s estate was in real terms a small proportion of what it had been in 1965.

The well-known principles arising from this case are:

  • The “duty of trustees to act with due diligence and prudence in the discharge of their duties,”
  • The separate responsibility of each trustee, it being “elementary that a duty of diligence rests on each trustee,” and
  • The “duty of impartiality”, it being “elementary that a trustee must act with strict impartiality and endeavour to maintain a balance” between the interests of different beneficiaries or, “Put another way, a trustee must be even-handed as between income and capital beneficiaries.”

Implications of Mulligan for charities

The Mulligan principles impose onerous obligations on all trustees, and first and second Mulligan duties clearly apply to charitable trustees, but whether and how the third principle may apply to charities is at present not clear.

In Mulligan the Court placed emphasis on the fact that the widow “enjoyed a substantial gross income” after the farm was sold as well as from her own considerable investments, and was not reliant on income from fixed interest securities.   Given those factors, the Court considered “it was plainly time for the estate to diversify” to advantage the capital beneficiaries as intended by the testator.

There appears to be a case for applying similar principles to charities.  I suggest that charities enjoying a substantial income and having considerable investments and equity should not focus on preserving capital and increasing wealth if this disadvantages the intended purposes of the charity.   Charities should advance their charitable purposes as required by statute and their constitutions, and a “duty of impartiality” between increasing or retaining wealth and each year advancing charitable purposes could apply to charitable trustees.

What are New Zealand charities doing?

According to the Charities Commission website of about 25,000 registered charities in New Zealand, some 7,500 trusts made monetary grants to their intended beneficiaries in their last financial year, while more than 1,500 further charities have “making grants” expressed as their main activity and a further 3,000 having “making grants” as a secondary listed activity.  That means that over half the registered charities made no monetary grants at all.

Why charities may make no charitable grants

Many charities provide charitable services and are not in the business of making grants.  Many of those that list “making grants” as among their activities will have valid reasons for not making grants; many have no equity whatsoever and many have little or no income.  Many more charities may have made considerable donations in previous financial years or lost equity in the recession and are rebuilding equity once again, while others may be saving for a special future purpose.  Such charities may be maintaining a balance between survival of the charity and the interests of the charity’s intended charitable beneficiaries.  For other charities, merely owning, maintaining and making valuable facilities available for community use (for instance art galleries, heritage sites, parks, and places of worship) may suffice to realise their charitable purposes.

Income-rich charities not making charitable grants

However, a significant number of charities in a position to make grants appear not to do so.  Trustees of such charities need to ask themselves whether they are acting appropriately in deciding to increase or retain the charity’s wealth rather than actively advancing charitable purposes on a more regular basis.

The issue is highlighted if one looks at charities with valuable assets and high levels of annual income, consistently making minimal monetary grants to further their stated charitable purposes.  Consider these charities whose purposes include “making grants”:

Charity Approximate capital   in last reported financial year Approximate average   gross annual income over 3 years Approximate average   net annual income over  3 years Average annual   grants over last 3 years
A

$400 million

$30 million

$3 million

Nil

B

$380 million

$160 million

$3.5 million

$201,000

C

$80 million

$4.5 million

$1.5 million

$335,666

D

$70 million

$3 million

$1.5 million

$44,000

E

$60 million

$12.5 million

$6.5 million

Nil

F

$26.5 million

$22 million

$2 million

$15,666

Being prudent charitable trustees

In Mulligan the estate had substantial income and considerable investments and equity, and neither the widow nor the estate was reliant on trust income but trustee decision-making ignored the impact of the investment strategy on the ultimate capital beneficiaries.  If charitable trustees have a “duty of impartiality” in governing charities and have the resources to do so, should they be advancing their charitable purposes, whether through monetary grants or otherwise, to advantage the charity’s intended beneficiaries?  If they fail to do so could they find themselves in the same position as the trustee company in Mulligan?

This is one of a series of articles on societies and charitable trusts (originally published in the NZ Lawyer magazine) by Mark von Dadelszen, a Hastings lawyer and author of Law of Societies, 3rd Edition, 2013. If any reader has examples of issues that have arisen or questions about societies or charitable trusts that might be a suitable subject for one of these articles please contact Mark at mark.vondadelszen@bvond.co.nz.