21.0 Charitable Trusts

21.1 In General
21.2 Cy Pres
21.3 Oversight of Charitable Trusts
21.4 Endowments


21.1 In General

By nature, charitable trusts pose two difficulties: 1) indefiniteness of beneficiaries; and 2) objections based on the rule against perpetuities. See Miller v. Mercantile Safe Deposit & Trust Co., 224 Md. 380, 385-86 (1961). Section 14-301 was purposed to address these difficulties. See id. at 386 (“[T]he statute was intended to and did provide a method by which charitable bequests that had failed might be distributable "as nearly as possible" in a manner that would carry out the intention of the testator.”). Prior to this statutory enactment, the common law ruled over charitable trusts in Maryland. Under common law, an unincorporated devisee could not receive a testamentary gift because it was not an "artificial person created by the law, and its membership not being certain and definite, and the courts of this state having no jurisdiction to enforce charitable uses under the statute of 43 Elizabeth, or apart from its provisions." Reisig v. Associated Jewish Charities, 182 Md. 432, 442 (1943) (citations omitted).

The law governing charitable trusts is as follows:

(a)    Courts of equity have full jurisdiction to enforce trust for charitable purposes upon suit of the State by the Attorney General or suit of any person having an interest in enforcement of the trust.

(b)     "Charitable purposes" includes all purposes within either the spirit or letter of the statute of 43 Elizabeth ch. 4 (1601), commonly known as the statute of charitable uses.

(c)    A charitable trust shall not be held invalid or unenforceable merely because the beneficiaries of the trust constitute an indefinite class.

Md. Code Ann., Est. & Trusts § 14-301. Significantly, the § 14-301 specifically adopts the statute of Elizabeth. The incorporation of the statute of Elizabeth is necessary because charitable trusts have indefinite beneficiaries.²³  The statute of Elizabeth enumerates some of the established purposes for which a charitable trust may be established, including: relief of the aged, relief of poverty, advancement of education, advancement of religion, promotion of health and other broad-based community purposes. The purpose requirement prohibits trusts for non-charitable uses. See, e.g., Shenandoah Valley Nat’l Bank v. Taylor, 63 S.E.2d 786 (Va. 1951) (setting aside a trust that directed payments to school children but was not tied to advancement of education, alleviation of poverty, or any other recognized charitable purpose.) Section 14-301 also ensures that a charitable trust is not be invalidated simply because the beneficiaries are indefinite. See, e.g., Rabinowitz v. Wollman, 174 Md. 6 (1938) (upholding as valid a testamentary gift to “such religious, charitable, scientific, literary or educational Hebrew Corporations or associations organized and operated exclusively for such purposes as may be selected by my Executors”).

21.2 Cy Pres

Maryland’s statutory cy pres states as follows:

(a) If a trust for charity is or becomes illegal, or impossible or impracticable of enforcement or if a devise or bequest for charity, at the time it was intended to become effective, is illegal, or impossible or impracticable of enforcement, and if the settler or testator manifested a general intention to devote the property to charity, a court of equity, on application of any trustee, or any interested person, or the Attorney General of the state, may order an administration of the trust, devise or bequest as nearly as possible to fulfill the generally charitable intention of the settler or testator.

(b) This section shall be interpreted and construed to effectuate its general purpose to make uniform the law of those states which enacted it.

(c) This section may be cited as the Maryland Uniform Charitable Trusts Administration Act.

Md. Code Ann., Est. & Trusts § 14-302. This provision generally follows common law cy pres rules. Note that the cy pres doctrine does not trigger under the statute if the instrument includes a gift over clause. If there is a gift over in the instrument, then the impossible charitable bequest yields a secondary devisee. The absence of a gift over indicates a general charitable intent which triggers cy pres. Miller, 224 Md. at 389-90. In Home for Incurables of Balt. City v. Univ. of Md. Med. System Corp., 369 Md. 67 (2002), the court addressed a will which contained a gift over and an illegal provision in the primary charitable bequest. The will provided for the residue to go to the Keswick Home in order to construct a new building "for white patients who need physical rehabilitation." Id. at 69. The will provided further that if the bequest was not acceptable to the Keswick Home then the bequest would go to University of Maryland Hospital to be used for physical rehabilitation. The racially discriminatory condition is (obviously) illegal and therefore Keswick Home could not comply with that condition. The University of Maryland Hospital claimed that it was the proper recipient of the bequest under the gift over provision because cy pres was inapplicable to reform the improper direction attached to the gift to Keswick Home. Under the University of Maryland Hospital's theory, the cy pres statute would only direct reformation of the Keswick bequest in the absence of the gift over. The Court of Appeals refused to accept that interpretation. It instead excised the illegal condition from the bequest (effectively treating the condition as a nullity) and permitted Keswick to receive the gift:

"[N]othing in the language of the cy pres statute mandates a rule that a court cannot excise an illegal condition attached to a charitable bequest whenever the will contains an express gift over or a revisionary clause. Furthermore, where the gift over is also to a charity, it would seem that the testator's general charitable intent is confirmed…

The Maryland cases dealing with cy pres doctrine have not involved illegal bequests. Rather, they have involved charitable bequests which could not be carried out for other reasons. Even in this situation, however, where the testator's intent is not contrary to law and public policy, the Maryland cases have not adopted the absolute rule contended for by University Hospital. Instead, the presence or absence of a gift-over is merely one factor among many in determining whether the testator had a general charitable intent and whether the cy pres doctrine should be applied to save the charitable bequest at issue…

We continue to adhere to the holding in Fleishman v. Bregel, supra, 174 Md. 87, 197A 593, that where a condition attached to a bequest is clearly illegal and violates a strong public policy, the illegal portion of the condition should be excised and the bequest enforced without regard for the illegal condition. Moreover, this principle is consistent with the purpose of the cy pres statute, and, therefore, is fully applicable to illegal conditions attached to charitable bequests….

Consequently the provisions of the will should be administered as if the word 'white' was not contained in the bequest to the Keswick Home."

Id. at 83-85.

21.3 Oversight of Charitable Trusts

Section 14-301 gives the courts of equity full jurisdiction to enforce a charitable trust upon a suit by the Attorney General or a suit by any person having "an interest in the enforcement of the trust." The Restatement (Second) of Trusts § 391 provides: “A suit can be maintained for the enforcement of a charitable trust by the Attorney General or other public officer, or by a co-trustee or by a person who has a special interest in the enforcement of the charitable trust, but not by persons who have no special interest or by the settlor or his heirs, personal representatives or next-of-kin." In other words, the general rule appears to be that the settlor has no special interest in the enforcement of his or her charitable trusts. See, e.g., Carl J. Hertzog Found., Inc. v. Univ. of Bridgeport, 699 A.2d 995 (Conn. 1997) (interpreting Connecticut's version of § 14-301 which is identical to that of Maryland). Maryland has liberal rules regarding standing to object to the operation of a charitable trust. In Gordon v. Baltimore, 258 Md. 682 (1970), a taxpayer in his status as taxpayer was granted standing to sue to prevent the transfer of the Peabody Institute library to another Baltimore library.²⁴  Given the rule in Gordon, a settler as a taxpayer presumably would have standing under the liberal Maryland rule to object to the operation of a charitable trust. To date, this issue of standing has not been resolved by Maryland courts.

21.4 Endowments

Maryland has adopted the Uniform Management of Institutional Funds Act. See Md. Code Ann., Est. & Trusts §§ 15-401-15-402 & 15-409. Under these provisions, the governing board of a charity may use the net appreciation²⁵ over the historic dollar value of an endowment free from the restrictive provisions governing the endowment itself. § 15-402. For a donor to reverse this result, it is not sufficient for the gift to be an endowment and for only its income, dividends or the like to be used for the charitable purposes. If a donor wants to have the assets which establish the endowment fund remain as the fund along with all of the appreciation on that original historic amount, he or she must specifically reverse the statutory provisions.

The Uniform Management of Institutional Funds Act was the result of a Ford Foundation study conducted in the late 1960s. The study found that enormous amounts of funds were locked in endowments in various colleges and universities. Currently, 46 states have adopted the Act. It is designed to free assets from restrictive gifts:

"Over the past several years the governing boards of eleemosynary institutions, particularly colleges and universities, have sought to make more effective use of endowment and other investment funds. They and their counsel have wrestled with questions as to permissible investments, delegation of investment authority, and use of the total return concept in investing endowment funds. Studies of the legal authority and responsibility for the management of the funds of an institution have pointed up the uncertain state of the law in most jurisdictions. There is virtually no statutory law regarding trustees or governing boards of eleemosynary institutions, and case law is sparse. In the late 1960's the Ford Foundation commissioned Professor William L. Cary and Craig B. Bright, Esq., to examine the legal restrictions on the powers of trustees and managers of colleges and universities to invest endowment funds to achieve growth, to maintain purchasing power, and to expend a prudent portion of appreciation in endowment funds. They concluded that there was little developed law but that legal impediments which have been thought to deprive managers of their freedom of action appears on analysis to be more legendary than real. Cary and Bright, The Law and the Lore of Endowment Funds, 66 (1969)…

One further problem regularly intruded upon the discussion of efforts to free trustees and managers from the alleged limitations on their powers to invest for growth and meet the financial needs of their institutions. Some gifts and grants contained restrictions on use of funds or selection of investments which imperiled the effective management of the fund. An expeditious means to modify obsolete restrictions seemed unnecessary…

It is established law that the donor may place restrictions on his largesse which the donee institution must honor. Too often, the restrictions on use or investment become out-moded or wasteful or unworkable. There is a need for review of obsolete restrictions and a way of modifying or adjusting them. The act authorized the governing board to attain the acquiescence of the donor to release the restrictions and, in the absence of the donor, to petition the appropriate Court for relief in the appropriate cases."

Prefactory Note to Unif. Mgmt. of Inst. Funds Act (1972).

Maryland has also adopted § 15-407 as part of the Act to permit a release of restrictions on the use or investment. Section 15-402, which redefines endowment, addresses the same concern of attempting to free endowment funds from provisions that were seen as overly restrictive by the Ford Foundation.

^{23 As legal scholars have noted, the indefiniteness of beneficiaries should not be an objection to a charitable trust but a requirement for a charitable trust. George G. Bogert, George T. Bogert & William K. Stevens, The Law of Trusts and Trustees § 363 (2d ed.1977).
24 This case gives a wonderful history of George Peabody's interests and the history of the Peabody Institute in Baltimore and the Peabody Institute also created by George Peabody in Nashville, Tennessee which is now part of Vanderbilt University. 
25 Both realized and unrealized appreciation may be used.}