Charitable Gifts in Perpetuity: Not a Great Idea
Two news stories from 2015 highlight the problem of the “dead hand” reaching out from eternal slumber, squeezing the life out of needed flexibility for a charitable institution established long ago by a bequest.
“The Law” disfavors anything in perpetuity; hence, the dreaded Rule Against Perpetuities that is the bane of the existence of every first-year law student:
The common rule against perpetuities forbids some future interests (traditionally contingent remainders and executory interests) that may not vest within the time permitted; the rule “limits the ability of a decedent to exercise dead hand control over property, which the state wishes to be alienable. In essence, the rule prevents a person from putting qualifications and criteria in his/her will that will continue to control or affect the distribution of assets long after he or she has died, a concept often referred to as control by the “dead hand” or “mortmain“.
Now – technically – the Rule Against Perpetuities applies only in cases of said contingent remainders and executory interests, and doesn’t prohibit a generous soul from establishing a charitable testamentary trust with all sorts of qualifications and conditions. But the general idea holds: Perpetuity is a very, very long time indeed.
It’s usually not a great idea to include lots of restrictions that could get in the way of progress one hundred years later, even to the point of leaving the charitable institution with no choice but to shut its doors.
Charitable Trust No. 1: Sweet Briar College
Last year, we discussed the case of Virginia’s Sweet Briar College – a small, women-only, liberal-arts college in the beautiful foothills of the Blue Ridge Mountains.
Over 100 years ago, its founder created a testamentary trust to establish the college on the grounds of her family’s (former) plantation as a memorial for her deceased daughter. At that time, promoting women’s higher education was a progressive concept, and establishing a single-gender college was a logical decision. Not only was the land tied up by this bequest, but there were restrictions on use of the endowment as well.
In March 2015, the board of directors was summoned to a special meeting, at which the interim president announced that he and the executive committee had determined that the school was facing “insurmountable financial difficulties” and would need to close at the end of the semester.
A firestorm of opposition erupted, and within a few months, the leadership had been ousted and a committed group of supporters had rallied enough support and financial resources to keep the college open for the 2015-2016 academic year.
But it was a mess. The local county attorney intervened in order to protect the charitable trust and assets; she argued that the proposed closing of the college would violate the terms of the will. The matter went up to the Virginia Supreme Court on an expedited basis before a mediated settlement had saved the institution.
In addition to the issues raised by the county attorney, another matter was whether the terms of the endowment could be altered to free up needed cash. The settlement made that point moot.
Another issue that did not arise, but was at least discussed, was the possibility of attracting more students by making the college co-ed. Of course, the terms of the founder’s trust specified that it would be a women-only educational institution. It’s unclear whether a court would have ordered that testamentary condition to be ignored. (The matter has come up, in cases of other financially struggling, women-only institutions; having to go to court to seek a judicial order revising a testamentary trust is no easy – or sure – road.)
Charitable Trust 2: Paul Smith’s College
Another higher education case was decided by the terms of a testamentary trust created long ago. It, too, involved a struggling institution – this time in rural, northern New York State.
Paul Smith’s College is “the only four-year college in the six-million-acre Adirondack Park.” Its “students are mostly from rural communities, and nearly all receive financial aid.” It is “known for its hospitality and forestry programs.”
As a rural school without wealthy alumni, it was encountering tough financial woes that were serious enough to possibly force the college’s closure.
In the past, Paul Smith’s College had benefited from the generosity of Sanford I. Weill, billionaire financier, and his wife, Nancy. “The Weills own a home near the college, and Mrs. Weill has said she was impressed by Paul Smith’s.”
“Mrs. Weill has been actively involved with the college’s development for more than two decades and served on the board of trustees.” The couple had donated many millions of dollars themselves, and garnered donations from others. The campus library and student center are named in her honor.
But, in 2015, when the school was in more serious financial straits, the Weills offered a $20-million gift, but it was “on the condition that Paul Smith’s College change its name to Joan Weill-Paul Smith’s College.”
But there was a hitch – in addition to the fact that the Paul Smith students, staff, and alumni were not crazy about the cumbersome proposed name.
Paul Smith’s College had been created by testamentary trust and a condition of that bequest is that the college be named after Paul Smith “in perpetuity.” Of course, because of this restriction, it would take a court order to proceed.
The court was not impressed, and denied permission to break the iron-clad condition of the charitable trust.
Previously, in “Naming Rights: It’s a Philanthropic Jungle Out There,” we had discussed the complexities of so-called “renaming gifts.” But when the name is tied up in knots in a charitable trust, the complications multiply – and may be insurmountable.
At the time that a charitable trust is created or, indeed, when any sizeable donation is made, the restrictions on the use of the funds may seem prudent and logical. But times change, and needs change, and flexibility should be an important consideration. Anything “in perpetuity” is probably not a great idea.