Acting as Trustee
(Added 9/14/2009)
I've heard a lot about whether a charity should act as a trustee. I am a donor who, once I get a sense that the economy will pick up again, is thinking of establishing a charitable remainder trust,and wonder if charities can ethically act as a trustee of a remainder trust because they have an inherent interest in the trust. Although the people at the university I will be donating to don't insist, they do say it's normal for the organization to be the trustee. I'm not talking about a charity's ability to do or hire out the work - I've talked with many people, including my legal advisor, about that - but I'm asking if charities don't have a conflict of interest here.
The concept of "split-interest" the key characteristic of remainder trusts - gives rise to all sorts of ethical issues. As remaindermen, charities do have a dog in the fight, but that does not mean they have a conflict of interest. Even if you think they do, however, the key issue is whether the university can act in the interests of both parties the income beneficiary (which would probably include you) and the remainderman (itself) in an able and open manner. And, if I read between your lines a little, that many good and honest charities act as trustee ("everybody does it") is by itself no defense of the argument.
The defense is in the realities. Acting as trustee of a reminder trust is a specialty assignment. In considering the interests of both parties, the trustee needs to be competent in - or be able to supervise another organization's competence in - arcane tax law, investments that, while they are tax free, must take into consideration tax issues, and the growth and income objectives for the charity and income beneficiary.
And even if the charity hires out the day-to-day work that is, it does not make specific investment decisions, does not send beneficiary checks, and does not complete IRS forms it still must have a solid understanding of all the component parts and make strategic decisions as it partners with whatever organization it hires. Lacking that, the charity should not act as trustee.
Although it composes one half of the affected parties in a remainder trust, a charity that possesses and employs the relevant competence, and is aware of its responsibilities to act as trustee, is not acting unethically.