How & Why The AG Supervises Charitable Trusts
The following information is presented on-line for informational use only and without warranty as to its accuracy, timeliness, or completeness. It does not replace any official versions of this information. (Mich Dept of Attorney General Web Site - www.michigan.gov/ag)
How and Why the Michigan Attorney General
Supervises Charitable Trusts
by David W. Silver, Marion Y. Gorton and Joseph J. Kylman*
A charity, in the legal sense, may be more fully defined as a gift to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds or hearts under the influence of education or religion, by relieving their bodies from disease, suffering or constraint, by assisting them to establish themselves in life, or by erecting or maintaining public buildings or works or otherwise lessening the burden of government.
Scarney v Clarke, 282 Mich 56, 63 (1937) citing Jackson v Phillips, 14 Allen (96 Mass.) 539, 536.
Recent years have seen the boundaries between charity and business blur, with charities running thrift stores and selling donated vehicles, not to mention many health care nonprofit corporations holding for-profit subsidiary pharmacies and clinics. With all of these developments, it is important to clearly distinguish between nonprofit and for profit entities and between charities and other nonprofits. Even though a for-profit corporation or business may perform some charitable activity, it does not become a charity simply by doing good deeds. Nor is every nonprofit corporation a charity or a charitable trust. But any nonprofit corporation or organization may be considered a charity if its purpose is to benefit the public.
A "common sense" approach tells us that museums, libraries, and hospitals, where people routinely give their time and money for charitable causes, and where people obtain educational or social services for free or low cost, qualify as charities. Charities are seen as encompassing some altruistic program or purpose. On the other hand, restaurants, stores, or other businesses, even though they may on occasion perform good deeds, are not charities. The lines seem clear, but what of the organizations that apparently have a charitable purpose but also conduct business activities, or nonprofits that lobby on behalf of disabled persons or environmental issues? What standards apply to determine if these organizations are charitable? The following paragraphs provide some guidelines for identifying a charity and some of the obligations incumbent upon a charitable organization or a charitable trust.
The Michigan Attorney General has an active role in any charitable trust's life. The Attorney General seeks to protect these charities' beneficiaries -- the public. Two important pieces of legislation, the Supervision of Trustees for Charitable Purposes Act ("Charitable Trust Act"), 1961 PA 101 as amended by 1967 PA 295, and the Charitable Organizations and Solicitations Act ("Charitable Solicitations Act"), 1975 PA 169 as amended by 1976 PA 368, codified the Attorney General's mandate to work on behalf of the public which generously gives its time, energy, money and creativity to charities, and which also relies on charities to do important work, from sponsoring cancer research to buying books for the local library.
On a day-to-day basis the Charitable Trust Section of the Attorney General's office has the primary responsibility for guarding charitable trusts.1 To fulfill this mandate, the Charitable Trust Section registers charitable trusts, licenses charities to solicit funds, monitors their operations, and oversees any changes that may occur in a charitable trust's form or existence. The Charitable Trust Section serves as an important repository of information about charities, maintaining files that are open to public inspection. At the same time, the Attorney General monitors the activities of organizations to protect Michigan citizens from illegal scams that try to pose as legitimate charities.
The Michigan Attorney General has taken an interest in a number of well- known charitable trust issues in the past few years, most notably, the numerous mergers and acquisitions among Michigan hospitals. In 1996, Attorney General Frank J. Kelley challenged an attempt by Columbia/HCA to establish a joint venture where charitable assets of the 501(c)(3) hospital would be used for the benefit of the for-profit corporation. The Attorney General took an active role in this proposed deal to ensure that charitable assets amassed under a charitable tax exempt status were protected for the benefit of Michigan residents and donors.
Identifying a Charitable Trust
A charitable trust comes into existence when a charitable entity, or a noncharitable trustee such as a bank, is entrusted with assets that are to be used for a charitable purpose. As the Charitable Trust Act says, a charitable trust exists any time there is a "relationship where a trustee holds property for a charitable purpose."2 This broad statement means that those assets held in trust, which can range from cash and securities, to office supplies or equipment, or real property, must be used within certain legal boundaries for the public's benefit.
The first, and most important, feature of a charitable trust is its core purpose. A charity declares its charitable intentions in its articles of incorporation, bylaws, trust indenture, public statements and activities. The articles of incorporation, or other organizational documents, do not need to have any "magic" words to make it a charity.3 Nor must a will or trust instrument have special language to create a charitable trust. Instead, the intentions of the individuals who form the organization and the intent of those who donate to it are the most important factors considered when a court determines whether a trust is a charitable trust. The founders and donors must have a "general charitable intent" to create a charity.4
In general, Michigan law favors charities. "Charitable trusts are construed liberally and given effect whenever possible."5 In part, this liberal treatment of charity goes back to the quote from Jackson v Phillips, one of the most famous charitable trust cases in this country. As the Massachusetts court noted more than 100 years ago, charities serve a broad public role. When individuals do what they are not required to do - help others - then the law will do whatever it can to ensure that their work is supported and continued.
Second, to be a public charity an organization must benefit the indefinite public. The Michigan Supreme Court, in a central charitable trust case said, "A distinguishing characteristic of such a trust is that the prospective beneficiary is undetermined and unknown, and while such a trust need not be for the benefit of the entire public, yet it must be public in nature and for unascertained beneficiaries."6 This characteristic distinguishes a charity from a trust designed to benefit specific people, like members of the same family. An organization like a disaster relief charity may limit itself to helping those in need from a particular emergency, but it is a charitable trust because of its willingness to provide services to unspecified people from the general public, even though the public in this case may be limited to a certain specific subgroup of the population.
Tax Status and Corporate Form
Third, a look at the structure and tax status of an organization will help identify a charity. Though not every Michigan charity chooses to incorporate, those that do are typically created under the Michigan Nonprofit Corporation Act7 or other statutes that apply to specific nonprofit corporations. Charitable organizations are, by definition, nonprofit. Therefore, if an association, group, or organization chooses to incorporate and maintain itself as a charity, it must be nonprofit under Michigan law, and all earnings of the entity must be used by the organization to help fulfill its charitable purpose.
By being a nonprofit organization, a charity can dedicate more of its assets to its work, and less to taxes, since nonprofit organizations may be exempt under a number of different Internal Revenue Code sections. Most typically, section 501(c)(3) applies to charitable organizations. This status is granted by the Internal Revenue Service to organizations which meet certain requirements. Section 501(c)(3) status means that donors can most likely deduct contributions to the organization up to limits imposed by the Code. With this incentive, organizations are better able to obtain the funding they require.
Becoming a 501(c)(3) organization provides advantages, but it also imposes obligations and expectations. One absolute requirement of such status is that there must be no private inurement. While employees and officers may be reasonably compensated for services rendered to the organization, they must not receive gifts or unearned benefits. If there are shareholders, they can receive no dividends or increased value on the interest they hold in the charity; i.e., one does not "invest" in a charity. All earnings and increased value must be used to accomplish the purpose and fulfill the mission of the organization. There are also strict limits on the amount of lobbying activities and an absolute prohibition on direct political activities. A charitable organization operating under 501(c)(3) tax exempt status may not engage in political campaigns of any kind.
State and local governments may also extend tax breaks to charitable organizations. Michigan grants sales tax exemptions to charities. Taxpayers are also given incentives to donate through tax credits for donations given to certain kinds of educational institutions, community foundations, and charities that provide direct assistance to the homeless or hungry. Looking at tax status alone will not settle whether an organization is a charity or merely a nonprofit corporation, but together, nonprofit status and 501(c)(3) tax exemption provide evidence of charitable intent. And most clearly, an enterprise that is incorporated as a for-profit business without tax exemption is not a charity.
The most straightforward method of determining whether an organization is a charity or a charitable trust is to consult Michigan law and the Charitable Trust Section of the Attorney General's office.
In some instances, the Michigan Legislature has passed a law specifically making an organization, or a type of organization, a charity. Blue Cross and Blue Shield of Michigan is an example of such an enterprise. In that statute the Legislature said, "Each corporation subject to this is declared to be a charitable and benevolent institution and its funds and property shall be exempt from taxation by this state or any political subdivision of this state."8
Similarly, an organization is a charity if it clearly fits within the definition of a "charitable organization" under the Charitable Solicitation Act. The Legislature used expansive and encompassing language to describe a charity in that Act saying that "'[c]haritable organization' means a benevolent, educational, philanthropic, humane, patriotic, or eleemosynary organization of persons...."9
Thousands of charities either holding assets in Michigan, soliciting funds in Michigan, or both, have files with the Charitable Trust Section, and a determination has been made as to their charitable status. If an organization is registered with the Attorney General's office as a charitable trust, or if it has a license to solicit donations, then that is evidence of its charitable status. A telephone call is all that is required to discover if the staff of the Charitable Trust Section has determined if the entity is a charitable organization.
When Should an Organization File with the Attorney General?
The Attorney General's office recommends that if there is any doubt or question, an organization should seek a determination of whether it is a charity that needs to obtain a license if it solicits or receives contributions or register if it holds charitable assets in Michigan. It is best for the organization to obtain this determination before a member of the public asks or challenges it. Organizations and attorneys representing organizations should keep in mind that the determination is made by Charitable Trust Section of the Department of Attorney General, not by the organization or by any person representing or advising the organization.
Registering with the Attorney General
Within two months of acquiring charitable assets, the directors or trustees must provide certain information to the Attorney General's office by filing a registration statement and an Inventory of assets held. Depending on the type of entity Registration and Inventory Form for Corporations or a Registration and Inventory Form for Trusts should be completed. The Charitable Trust Section asks for a copy of the determination letter from the IRS granting 501(c)(3) tax exempt status and copies of the articles of incorporation, bylaws, constitution or trust document that establishes the organization. To maintain registration, the organization must file annual financial accountings. These may be a copy of the return sent to the IRS, a certified audit, bank trust accounting, or annual accounting filed with the Probate Court.
The Charitable Trust Act provides no minimum dollar threshold for registering. Any charity holding any assets in Michigan is subject to supervisory authority of the Attorney General unless a specific exemption applies. Although even very small organizations have an obligation to register, the Charitable Trust Section process takes into consideration the scarce resources and minimal expertise available to these groups. There is no fee for registering.
By providing information, such as the creating documents, legal name, assets, and the names of trustees or directors, the Attorney General's office knows where a charity is located, what its function is, and who operates it. Requiring annual financial reports and updates on changes in structure and directors helps the Charitable Trust Section staff monitor the charity and make sure that assets are being appropriately used and guarded.
While charity has been broadly defined, Michigan also recognizes exemptions and exceptions for certain categories of charities. For example, churches and religious organizations are completely exempted from all registration and licensing requirements.10 Governmental entities and agencies are likewise exempt.11 Hospitals have been exempted from charitable trust registration and reporting, as well as solicitation licensing requirements. Educational institutions and national veterans groups are exempted from the solicitation act.12
Court Proceedings, Estates and Living Trusts
The Charitable Trust Act also makes the Attorney General a necessary party to any court proceedings regarding the termination, modification, or interpretation of a charitable trust. If, after specific bequests, any portion of a will or living trust is to go to charity, or the will or living trust creates a charitable trust, the Attorney General's office is an interested party and is to receive notification. If a trust is established by a will to hold assets or funds for a specific charitable cause or organization, then most likely the trust needs to be registered with the Attorney General.
Charitable Solicitation License
Some charities have large endowments, established by individuals or groups, from which they use the income to run their organization and to perform their work. Other equally active and thriving charities must look to the public on a regular basis to raise money. A charity that solicits or receives contributions from Michigan sources in excess of $8,000, or a charity that compensates individuals for fund raising services, must have a charitable solicitation license, unless an exemption applies. It is important to note that a Michigan Charitable Solicitation License (MICS) is required for those organizations that receive contributions even if the contributions are not actively solicited. Once again, like registering a charitable trust, a license is easy to obtain. It does not require an attorney to complete the application, nor is there any fee charged for the license. The license is to be renewed annually, with the application due six months following the end of the organization's fiscal year.
The MICS license helps the Charitable Trust Section do several things. When a charity has a MICS license, the Attorney General's office can provide Michigan citizens information about the charity. Though a license to solicit is not a guarantee that a charity is a commendable organization, the information in the application and annual financial report helps the Charitable Trust Section look closely at the organization's activities. Also, in the event that a charity behaves improperly when soliciting donations, the Attorney General has enforcement power, both civil and criminal, to compel compliance.
Ending a Charity
Though registration and licensing are related to a charity's active life, the Attorney General also oversees all dissolutions -- the end of a charity's life. In the best circumstances, a charity dissolves because the problem it worked to solve no longer exists. At other times, a charity dissolves when it merges with another like-minded organization. Frequently, a charity dissolves when it no longer has assets or personnel to carry on its mission. The Attorney General's oversight is crucial when a charity dissolves to ensure that charitable assets left in the organization are used for their intended purpose and that they are not improperly used for the benefit of some private individual.
Before a charitable trust is dissolved under Michigan corporate law, it must first obtain approval from the Attorney General.13 To provide such clearance for dissolution, the organization usually must submit a completed dissolution questionnaire to the Charitable Trust Section and provide information regarding its final financial status and proof that the assets were distributed appropriately under charitable trust law -- that is, to other charitable organizations that will use the assets to carry on a charitable purpose. Once the Charitable Trust Section gives its approval, the dissolution may proceed.
The Attorney General - Charity Partnership
The individual members, officers, and directors of a charity work on its behalf daily. That work, whether providing scholarships for the children of public safety officers killed in the line of duty or funding biomedical research, is routine and undisturbed by the Attorney General. However, at special and often critical points in time, the Attorney General's office ensures that a charitable organization is meeting donors' expectation and acting as a responsible steward of its assets.
By filling out an initial questionnaire, registering, applying for a license to solicit funds, or providing annual financial reports, the charitable organization fulfills its obligation of accountability to the public and provides the Attorney General with access to the information to enforce his supervisory authority if the need arises.
The Attorney General works in partnership with the charitable community to find ways to ensure the integrity of charitable solicitation efforts and responsible stewardship of charitable assets. The Charitable Trust Section has enjoyed the respect of the nonprofit community and is seen as a facilitator as much as a regulator. For their own protection, charities understand that to maintain a good reputation and continue to receive contributions and support from the public the Attorney General must serve as an important central figure in Michigan charged with guarding charitable assets.
For More Information
To receive copies of the charitable trust forms, register a charitable trust or ask specific questions please contact:
Charitable Trust Section
Department of Attorney General
P.O. Box 30214
Lansing, MI 48909
Though this article does not deal with professional fund raisers or soliciting public safety organizations, the Attorney General also has jurisdiction and regulatory authority over them. All professional fund raisers qualified to work in the state of Michigan must register with the Charitable Trust Section of the Attorney General's office.
Id. 1961 PA 101 as amended by 1967 PA 295, MCL 14.252 (b).
3 See Scarney v Clarke 282 Mich 56, 63; 275 NW 765 (1937)( citing 2 Restatement of the Law of Trusts, p. 1096, sec. 349, "A charitable trust may be created by (a) a declaration by the owner of property that he holds it upon a charitable trust; or (b) a transfer inter vivos by the owner of property to another person to hold it upon a charitable trust;" and citing 65 C.J., p. 231 "To constitute an express trust there must be an explicit declaration of trust, or circumstances which show beyond reasonable doubt that a trust was intended to be created").
4 In re Rood Estate, 41 Mich App 405, 420; 200 NW2d 728 (1972).
5 Id. at 422.
6 Scarney, 282 Mich at 64.
7 Id. Nonprofit Corporation Act, 1982 PA 162, MCL 450.2101 et seq.
8 Nonprofit Health Care Corporation Reform Act, 1980 PA 350, MCL 550.1102(1)
9 Id. 1975 PA 169 as amended by 1976 PA 368, MCL 400.272(a).
10 Id. PA 101 as amended by 1967 PA 295, MCL 14.253; PA 169 as amended by 1976 PA 368, MCL 400.272(a).
11 Id. PA 101 as amended by 1967 PA 295, MCL 14.253(a).
12 Id. PA 169 as amended by 1976 PA 368, MCL 400.283(d), (e).
13 Dissolution of Charitable Purpose Corporations, 1965 PA 169, MCL 450.251 et seq.
*with the invaluable assistance of Shoshie Levine