Exempt Organizations-Technical Instruction Program for FY 2003
Can a trust exist without beneficiaries? (cy pres)
Hypothetical
Suppose that a charitable trust is established to benefit X Hospital and has no
contingency plan if X Hospital goes out of existence. Suppose X Hospital
does go out of business. Was the trust charitable initially? Is the trustee now
required to terminate the trust and return the property to the grantor?
Trustor's intent
and cy pres
A primary rule of judicial interpretation of trusts is to determine and honor
the trustor's intent at the time of creating the trust. Am. Jur. 2d
"Trusts" § 35.
In some cases, a particular charitable purpose stated in the trust instrument
may become impossible, impracticable, illegal, or accomplished. If the court
determines that the settlor had a more general charitable purpose, it may
direct the application of the property to some charitable purpose which falls
within the settlor's general charitable intention. Restatement
§ 399. This is
the doctrine of cy pres ("as near as possible").
· In the case of X Hospital, the cy pres doctrine will be applied, and the
court may direct the property to be applied to another hospital unless the
trust terms provide otherwise. Restatement
§ 399 Comment o. However,
the State laws are not uniform in the application of the cy pres doctrine.
Application of
cy pres
The cy pres doctrine may apply in determining whether a trust's assets are
dedicated by operation of law to an exempt purpose. Rev. Proc. 82-2, 1982-1
C.B. 367, as updated by Exempt Organizations Technical Guidelines
Handbook IRM 7.8.2.3.3.6.4.1 (Feb. 23, 1999), sets forth guidelines for
determining whether and under what circumstances States would apply the
doctrine for this purpose.
· If the cy pres doctrine does not apply, then the trust instrument must
expressly provide for dedication of the assets to charitable purposes upon
dissolution. Reg. 1.501(c)(3)-1(a)(4).
· In many cases, the IRS must determine whether the settlor had a general
charitable intent, which may not be easy to determine. The case law of
the particular State is highly relevant. One guideline is that courts are
more likely to find a general charitable intention where the particular
charitable purpose fails down the road than at the outset of the trust.
Restatement
§ 399 Comment i. For an example of the application of cy
pres, see GCM 39377 (Sept. 28, 1984).
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