RESTRICTED CHARITABLE GIFTS: PUBLIC BENEFIT, PUBLIC VOICE.

• Author: Gary, Susan N.

1. INTRODUCTION

   Donors who contribute to charities or create new charities often have specific intentions about the use of their donated assets. One donor may want to ensure that the charity follows the donor's personal views about how best to address climate change. Another donor may want to support an already established program for homeless youth. And a third donor may want to devote resources to finding a cure for the Zika virus. These donors may impose restrictions on their gifts, trying to require the charity to honor their wishes over time, but over time, things change. What if the donor's views about climate change become outdated and the charity identifies strategies that the charity concludes will be more effective? What if the charity wants to expand its program for homeless youth to include veterans or mothers with children? And what if scientists find a cure for the Zika virus, but plenty of other mosquito-borne viruses continue to plague humans?

   In the face of change, the question will be who decides how best to use the charitable assets. The donor may have provided alternatives in the original gift instrument. If not, the charity may ask a court to apply cy pres to a purpose that has become impossible (the cure has been found), (1) or maybe wasteful (the endowment increased in value dramatically, producing far more income than needed to run the specified program). (2) The charity may not, however, be able to shift purposes to ones that, in the view of the charity, are more efficient or provide greater benefit to the public. (3) If the charity changes the purposes without donor approval or a cy pres authorization, the donor may want to challenge the charity's actions in court, but may not have standing to do so. (4) Issues involving donor intent and changed circumstances raise interesting policy questions, which scholars have debated in numerous articles. (5) Usually the analysis considers whether donors should have more or less control over gifts or whether charities should be able to modify restrictions. (6) The articles discuss the following conflicting themes:

   * Donor intent should be honored; (7) dead hand control should be discouraged or addressed. (8)

   * Donors should be able to direct the use of their philanthropic largesse; (9) the charity may need to adjust restrictions over time and will know best what changes to make. (10)

   * Managerial authority permits change over time; (11) obedience to purpose is an important fiduciary duty. (12)

   Although all these issues are important in thinking about charitable assets, this article will focus on the public's interest in charitable gifts and whether the public should have a voice separate from the voices of the charity and the donor. One can argue that either the donor or the charity, or both, represent the public interest in the way they direct the use of the charitable assets, but sometimes "the public" holds views about social good that differ from the views of the donor and the charity.

   If the public should have a voice, the obvious question is how can that voice be exercised. The office of the Attorney General (13) has traditionally represented the public with respect to charitable assets, while authority to make changes to a charity's purposes or management--the regulatory power--lies with the courts. (14) This article will consider the role of the Attorney General and the courts as arbiters of the public good, against a backdrop of some of the other issues affecting donor intent and modification of restrictions placed on charitable purposes.

   The article begins with a brief look at history, first the English roots of charitable trusts, then U.S. developments and the current state of the law in the U.S. The article proceeds to a discussion of cy pres, the primary means for modifying restrictions placed on charitable assets, and identifies other tools for modification. The article examines the role of donor intent in current law, considering cy pres and other strategies donors use to maintain their directions. The article then addresses the public benefit standard and whether the public should have a greater voice in modification decisions. An examination of proposals for reforming the way the law treats restricted gifts, developed by scholars over many years, reveals ideas that could increase the public voice through expanded application of cy pres. The article concludes by advocating increased consideration of the public benefit standard in charities law, through the adoption of some of these ideas.

2. HISTORY AND THE STATE OF THE LAW

   1. Early History--Charitable Uses and Charitable Purposes

      The use, a precursor of the trust, developed in England following the Norman conquest. (15) Donors employed uses to avoid restrictions on ecclesiastic corporations, and uses also held charitable gifts for educational institutions such as Oxford and Cambridge and for hospitals. (16) In the fourteenth and fifteenth centuries the monastic institutions, significant sources of charity for the poor, declined in numbers and in property. (17) Their decline occurred at a time of general social and economic upheaval and increasing need for those charitable services, and as a consequence the use grew in importance. (18)

      In 1601, England adopted the Statute of Charitable Uses (19) as part of an effort to deal with the economic and social issues and to clean up abuses in the administration of charitable gifts. (20) The preamble to the statute listed many charitable purposes common at the time, (21) but the statute did not on its face limit charitable purposes to those enumerated in the preamble. (22) Courts were left to determine the extent of what charity meant, but for the first century or more the list covered the types of charity contemplated by donors. (23) Then an 1805 decision, Morice v. Bishop of Durham, (24) held that only the purposes set forth in the 1601 statute were charitable. (25)

      Courts continued to struggle to define charity until 1891 when Lord MacNaughten's decision in the Pemsel case provided the following definition: "'Charity' in its legal sense comprises four principal division: trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of religion; and trusts for other purposes beneficial to the community, not falling under any of the preceding heads." (26) The definition includes purposes "beneficial to the community" without direct guidance as to what those purposes should be. This flexibility made it possible for the meaning of charity to change as society changed. (27)

      More recently, the 2006 Charities Act for England and Wales codified much of charity law, added new purposes to the four "heads," and created a Charities Commission. (28) The final category in the list of charitable purposes remains a broad one: any other purposes "that may reasonably be regarded as analogous to, or within the spirit of," the purposes listed, and any purposes which have been recognized as charitable under existing law. (29) In addition, the Charities Act codifies the requirement that an organization provide a public benefit, in order to qualify as a charity. (30)

      The idea that charity provides a public benefit can be seen throughout the history of charities law in England. Matthew Mills has written that the requirement that a charitable trust serve a public purpose developed later, in the nineteenth century, and has been part of the common law since at least 1862. (31) Matthews describes references in cases and treatises to the idea of public benefit as part of what was meant by a charitable purpose (32) and then examines the development of the requirement of public benefit in case law. (33) He explains that the requirement has two parts: the "charitable purpose must be a benefit to the community; and... those who benefit... must be sufficiently numerous to constitute a 'section of the public'" and not a group of private individuals. (34) The codification in 2006 emphasizes the importance of the public benefit rule, but the idea that charities and charitable trusts have a public purpose goes back centuries.

      From the initial list in the 1601 preamble, (35) to the Pemsel definition, (36) to the 2006 Charities Act (37) and current 2011 Charities Act, (38) the idea that a charity provides a public benefit and eventually a requirement that a charity must provide a public benefit has continued to be part of how the law in the United Kingdom thinks about charity. (39) These ideas carried over to the development of rules on charities and charitable purposes in the United States, and they relate to the role of the public in connection with donor-restricted gifts. (40)

   2. Charitable Purposes in the United States

      The United States developed its early charitable laws by importing the British version, although recognition of charitable trusts got off to a rocky start in a few states. (41) The concept of what constitutes a charitable purpose derived directly from the Statute of Charitable Uses. (42) A current formulation, in the Uniform Trust Code ("UTC") defines charitable purposes as "the relief of poverty, the advancement of education or religion, the promotion of health, governmental or municipal purposes, or other purposes the achievement of which is beneficial to the community." (43) The drafters of the UTC noted approvingly the history of judicial interpretation of "beneficial to the community." (44) The Uniform Prudent Management of Institutional Funds Act ("UPMIFA") uses the same definition, (45) and the Internal Revenue Code refers to the definition under trust law. (46)

      In the United States, the concept of charitable purpose has always included public benefit, with the flexibility of the concept permitting changes in what qualifies as charitable as public policy changes over time. (47) Racial restrictions that did not disqualify a charitable gift when made, have, years later, been found to be contrary to...