Donors’ Intent Jeopardized in “Orphan” Trusts

As donors die and no one is left to ensure fulfillment of their wishes, trustees can veer away from donors’ intent in distributing trust assets. For example, a donor may entrust his or her fortune to a small bank in donor’s home town for the purpose of giving back to the community. After donor’s death, a merger may occur, changing the composition of the decision makers. As a result, the trust’s annual donations often decrease, simultaneously increasing the trust value along with the proportionate trustee fees.

Orphan trusts taken over by large financial institutions are also in danger of self-dealing by the trustees. As new entities gain control of the donations, they have discretion not only over the way the money is distributed but also the selection of the beneficiaries. For example, foundation administrators have given money to their alma maters, universities where they teach, and private schools where their grandchildren are enrolled. Such acts boost a trustee’s image but are often incompatible with the wishes of the donor.

Another trend in modern philanthropy is making fewer but larger grants. This reduces administrative costs of managing the trusts; however, this practice also takes trust benefits away from a multitude of smaller institutions.

See Stephanie Strom, Donors Gone, Trusts Veer From Their Wishes, NYTimes.com, Sept. 29, 2007.

Special thanks to Alfred Brophy (Professor of Law, University of Alabama School of Law) and for bringing this episode to my attention.