Charitable trusts can be designed to avoid certain income taxes but often with frequently changing regulations; it can become difficult to maintain the tax-exempt status. As more and more banks merge and consolidate, trustees and administrators are faced with having to review older trusts and must work to integrate them in the newer systems. This can be difficult for anyone that is not familiar with regulations and estate planning.
Many charitable trusts are being found inadequate and do not meet the original goals of the tax-efficient administration. This especially relates to those that have not received tax-exempt status recognition from the IRS. These trusts can get complicated when this needed status faces challenges.
To be exempt from federal income tax, a trust must apply for and receive a determination letter from the IRS. To start the process, the governing document needs to have specific clauses pertaining to charitable purpose and dissolution. Unfortunately, this information is lacking in many of the older governing documents. Once the required information is gathered, the trustee must submit the Application for Recognition of Exemption of the Internal Revenue Code to the IRS.
In Pennsylvania, there are two main options for modifying trusts to meet the newer regulations. The first involves filing a Petition to Modify, with the Orphans’ Court having jurisdiction. Courts may approve trust instrument modification in order to correct mistakes, to adjust administrative provisions that preserves the trust, or to accomplish certain tax objectives. Before filing, a notice must be sent to the Office of Attorney General. Getting consent from the charitable beneficiaries is also recommended.
The second choice is to use the Pennsylvania Charitable Instruments Act. This contains provisions that may be prohibited or included by the governing instruments for any charitable trusts that superseded contrary provisions. This empowers the trustee with the authority to revise the charitable trust to add the needed dissolution and charitable purpose clauses.
A landmark decision years ago clarified the law in Pennsylvania; this case involved the Milton Hershey School. The Pennsylvania Supreme Court stripped the Milton Hershey School’s Alumni Association’s ability to use the courts to challenge a charitable trust and to set the rule for those who wish to use the courts for this matter. This ruling upheld an earlier decision that denied the designation of two individuals to manage the operation of this multi-billion-dollar trust. There is also a law in place that entrusts the Pennsylvania State Attorney General with the oversight of charitable trusts.
When it comes to planning a charitable trust, speaking with an experienced lawyer is the best choice for obtaining knowledge about estate planning. Our Media wills and estates lawyers at Eckell, Sparks, Levy, Auerbach, Monte, Sloane, Matthews & Auslander, P.C. will help those with estates. Contact us online or call us at 610-565-3701 for a free consultation. Located in Media and West Chester, Pennsylvania, we also serve clients in Delaware County, Chester County, and Montgomery County.
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