Bequests in wills and trusts can be a considerable source of income for charitable organizations.  Such organizations and their counsel, while remaining sensitive to the concerns of donors’ families, are well advised to pursue and protect their interests in any estate or trust proceeding involving a charitable bequest.  I describe here some important considerations on how best to protect the charitable interests in trusts and estates.

Review the instrument, such as the will or trust document, which provides for a bequest or payment to a charity.¹
If a charity learns that it has an interest in an estate or trust, someone should review the actual instrument in which such interest is set forth.  This should include ascertaining the amount or nature of the interest (including whether it is an outright payment of a specific amount, or a portion of the residuary), as well as any restriction imposed on the charitable gift being provided.  The charity and its counsel should not simply rely on a representation by counsel for the estate or trust, but ask to at least review the relevant language in the instrument.

If a specific amount is being given to a charity, it should make sure that the full amount is received. 
Outright payments should ordinarily be paid in full, and not subject to reductions for fees or taxes, which are not ordinarily the responsibility of charities that receive outright bequests or payments.  If a charity is asked to sign a receipt and release in order to receive the payment, it should make sure it receives the full amount.²

If a charitable gift or bequest is subject to a restriction (such as requiring it to be used for a particular purpose, and/or putting the monies into an endowment), the charity should determine that it is prepared to honor the restriction before accepting the gift. 
If for any reason a charity determines that a restriction is onerous (such as for a use which would be difficult to carry out) or inappropriate (such as for a purpose which is not part of its mission or is otherwise problematic), it should not accept the gift or bequest.  A charity should be prepared to honor scrupulously any restriction which is imposed, including any naming or honor which it is required to bestow.

If the beneficiary of a will or trust is named in the residuary (that is, the assets in a deceased person’s estate after all gifts are bequeathed and debts, taxes, administrative costs, probate fees and court costs are paid), the residuary beneficiary will be impacted by those fees and expenses.  It should therefore consider the conduct of the executor(s) or trustee(s) and the reasonableness of the fees and expenses of administering the estate or trust before signing off on an accounting by the fiduciary. 
An executor’s management of estate assets might improperly reduce the total value of the estate or trust (such as through imprudent investments or inappropriate expenditures).  The legal fees charged by the attorney representing the estate or trust could also impact the estate’s beneficiaries.  In both scenarios, assuming the charity has an interest in the residuary (as a recipient of an outright bequest should not be impacted by these considerations), charitable organizations have a right to challenge the accounting submitted by the executor (whether it is a judicial accounting submitted to the court or an informal accounting submitted to the interested parties.)

A will or trust instrument might be challenged by a family member who would benefit from the instrument being declared invalid.
When an individual chooses to leave substantial sums to charity in his or her will or trust instrument, such a bequest is often made to the detriment of the decedent’s family.  A relative of a decedent who is a “distributee” (that is, who would inherit from an estate by virtue of the relationship with the decedent in the absence of a will or trust), has legal standing to challenge the validity of the instrument.  The rules governing intestacy in New York are set forth in New York Estates, Powers and Trusts Law (EPTL) §4-1.1. Similar statutes exist in other states. The estate of a decedent who dies without a will is distributed among the distributees in a manner and order prescribed by the applicable state statute.

There are a variety of reasons why a will or trust might be challenged. 
They could include: (a) the lack of testamentary capacity of a decedent; (b) undue influence exerted on a decedent; or (c) an improperly prepared or witnessed instrument.  The technical rules on properly preparing and witnessing a will or trust are governed by state law.

Testamentary capacity and undue influence are related concepts which often form a basis for challenging the validity of a will or trust instrument. 
The testamentary capacity of the decedent can sometimes be a crucial issue, particularly when a decedent has executed multiple wills or trust instruments, has executed a codicil to a will or an amendment to a trust, has revoked a will, or has executed a document at a point in time where cognitive ability might be called into question. Since any amendments might prejudice the interest of at least one party to the original instrument, it is common for the party whose interests are impaired to raise concerns regarding the capacity of the testator or grantor.

When the testamentary capacity of a decedent is challenged, questions might be raised as to whether a beneficiary exerted undue influence to induce the allegedly vulnerable decedent to transfer or bequeath money to that beneficiary.  Charitable organizations can face both sides of these issues of capacity and undue influence, depending on whether their interests are best served by an earlier or the most recent instrument.

The circumstances with respect to a dispute involving an estate or trust, including whether a charity supports or opposes the disputed instrument, will impact the manner in which the attorney might best represent a charity.
If, for example, the charity supports the validity of the will or trust, the defense will ordinarily be led by counsel for the executor or trustee, and the charity’s attorney can minimize expenses by cooperating with or supplementing the actions of the estate or trust counsel.  If, on the other hand, a charity challenges a will or trust which might supersede a prior instrument in which the charity had a greater interest, its counsel would often have to play a more active role, perhaps in cooperation with other similarly aggrieved parties.

In New York, the Attorney General is a necessary party in proceedings where a charity has a residuary interest.
In New York and any other state where the Attorney General might have such authority, cooperation and coordination with the AG’s office in instances of disputes or questions can often enhance the likelihood that a charity will achieve a more favorable result. This could include a charity joining the Attorney General in defending or challenging a will or trust in which the charity has an interest, or disputing excessive legal fees or expenses or imprudent conduct by fiduciaries. The result can be achieved through either litigation or settlement.

Conclusion: Charitable organizations should be aware of the various issues that can arise in estate and trust matters, many of which can potentially affect the benefit ultimately received by charitable beneficiaries.
Organizations should work with their legal counsel to conduct appropriate due diligence and ensure that the organization’s interests have been protected before consenting to probate of a will or to the fees and expenses reflected in an accounting.

The post Protecting Charitable Interests in Trusts and Estates first appeared on Perlman Sandbox.

The decision to change an organization’s state of incorporation or situs—which I’ll call the “home state” here for convenience—is driven by various factors. Often, organizations make the move because the organization no longer has a nexus to the home state. Officers and directors may have moved to other states; organizations may not maintain any office or employees in the home state; or the organization may conduct business from wherever the single paid employee resides. Organizations may move their headquarters to another state for a variety of reasons, including, for example, the high cost of operating in the home state.

While some organizations move when there is no longer an operational nexus within the original home state, many organizations decide from the outset to form in a state other than that in which the organization’s day-to-day activities take place. For example, many nonprofit corporations choose to incorporate in Delaware because of its corporate-friendly laws for both for-profits and nonprofits alike.

Now to be frank, the trend for organizations to move out of New York is often partially driven by New York’s nonprofit laws. Administered by the New York Attorney General’s Charities Bureau (“Charities Bureau”), the laws governing nonprofit governance and transactions in New York are complex and onerous in many ways. Although the recently adopted New York Nonprofit Revitalization Act has eased certain regulatory burdens for New York nonprofits, the remaining governance and regulatory compliance requirements still impose a significant burden, more so than in most states. This translates into significant delays and cost to nonprofits in maintaining their compliance within New York.

Moving out of New York does not always completely eliminate the state’s ability to regulate the organization, especially if the organization continues to conduct some activities in the State. But it does reduce the State’s jurisdictional nexus for regulating many, if not most, of the organization’s governance and corporate transactions. Consequently, organizations, particularly those that no longer maintain an operational nexus to New York, are increasingly moving to less burdensome domiciles.

Below are three different forms of moving out of New York, and the procedures each form requires:

1.  New York Not-for-Profit Corporation to New State Corporation.

To change a New York not-for-profit corporation’s state of incorporation, the organization must:

• Incorporate a new entity in the target state;
• Obtain federal tax-exempt status for the new corporation; and
• Merge the New York corporation into the new corporation.

The two merging corporations must each comply with the legal requirements governing mergers in both New York and the target state. In New York, nonprofit mergers are subject to approval by the Charities Bureau. The members, if any, and the board of each corporation, must approve the transaction. As a final step, the New York corporation must close out its registration with the Charities Bureau. A variation of this option is for the New York not-for-profit to grant its assets to the new corporation and then dissolve. If the new corporation will hold property or assets, engage in charitable activities, or fundraise in New York, it may need to register with the Charities Bureau.

A few jurisdictions, such as Delaware, the District of Columbia, and Pennsylvania, permit organizations incorporated in those jurisdictions to convert their state of incorporation to another state without incorporating a new entity — a procedure knowing as “domesticating” or “redomesticating.” This permits an expedited option for corporations located in those states. Unfortunately, New York law does not permit domestication, necessitating the cumbersome moving process described here.

2. New York Charitable Trust to New State Charitable Trust.

Charitable trusts are formed in a particular state, but do not incorporate under the corporate laws of their home state. Trust instruments often designate both the situs of the trust, which is the state of the trust’s administration, as well as the state laws that will govern the trust—which may not be the same state. The courts of the situs state (and certain government agencies, such as the state Attorney General’s office) have oversight responsibility over the trust. Unless prohibited by the trust instrument, charitable trusts may transfer their situs to another state and the trust instrument may be amended to establish a new governing state law. A trust instrument could prohibit either kind of change, such that, for example, the situs may be transferred from New York to a new state while New York law remains the governing law. In that case, the courts in the new situs state would be required to interpret the trust instrument in accordance with the laws of New York. Transferring the situs of a trust generally requires court approval from both New York and the target state.

To transfer the situs of a New York charitable trust, the organization must undertake the following steps:

• Petition the court in the target state to assume jurisdiction over the trust.
• If the court in the target state agrees to assume jurisdiction, the trust must then petition the New York court, on notice to the Charities Bureau, to relinquish jurisdiction over the trust and direct that the situs of the trust be transferred to the target state.
• Following or simultaneous with these court approvals, the New York trust must file an informal accounting with the Charities Bureau.

If the charitable trust will no longer hold property or assets, engage in charitable activities, or fundraise in New York, the trust must close out its registration with the Charities Bureau.

3. New York Charitable Trust to New State Nonprofit Corporation.

Organizations originally formed as charitable trusts may choose to move to a new state as a nonprofit corporation, if such a change is not prohibited by the trust instrument. This change into corporate form has the benefit of providing the trustees with certain additional legal protections available through the state’s nonprofit corporation or general corporation laws.

To move a New York charitable trust to another state in the form of a corporation, the trust must:

• Incorporate in the target state;
• Obtain federal tax-exempt status for the new corporation;
• Obtain Charities Bureau approval to relinquish its oversight over the trust and transfer the assets to the new corporation by filing an informal accounting with the Charities Bureau; and
• Upon Charities Bureau approval, transfer the charitable trust’s assets to the new corporation.

The accounting must cover all of the years of the charitable trust’s existence, a requirement which can be difficult for older trusts. Depending on the language of the trust instrument, such a move may not be possible, or may only be possible following amendment of the trust instrument, if such amendment is permitted. If the charitable trust will no longer hold property or assets, engage in charitable activities, or fundraise, in New York, the trust will need to close out its registration with the Charities Bureau.

Moving is stressful, whether for persons or businesses. For nonprofits corporations and charitable trusts considering changing their home state, the long term benefits may in the long run be worth the cost.

The post Moving Out Of New York first appeared on Perlman Sandbox.