Educational, Religious, and Charitable Trusts

SIC 6732

Companies in this industry

Industry report:

The charitable trust industry is comprised of companies that manage educational, religious, and charitable trust funds and foundations. The industry also encompasses the trust operations of not-for-profit research institutes.

Industry Snapshot

Charitable giving is closely tied to the economy, and thus when the United States entered a recession in the late 2000s, many charitable funds struggled to meet financial goals. Not only did contributions falter, but a depressed stock market led to decreased revenues from investments. In 2009, the worst year economically since the Great Depression, charitable giving fell 3.6 percent to $303.75 billion, according to the Giving USA Foundation. This represented the steepest decline in giving, after adjusting for inflation, since the organization started keeping records in 1956. In the religious sector specifically, charitable giving fell less than 1 percent, whereas giving in education decreased 3.6 percent. Of the total contributions made, 75 percent came from individuals, 13 percent from foundations, 8 percent from bequests, and 4 percent from corporations.

Charitable trusts faced a somewhat similar although less severe situation in the early 2000s when the economy was down. In 2001, Americans donated $212 billion to charity, up just 0.5 percent from $210.9 billion in 2000. In the mid-2000s the economy had recovered strong and charities returned to pursuing active strategies to increase funding and reserves. During 2004 giving increased year-on-year by 5 percent to reach $248.52 billion. The largest recipients were religious and educational organizations.

Although banks provided most of the management services for charitable trusts, other institutions competed with banks in the late 2000s and early 2010s for control of the endowment management industry. In addition, trust departments at all financial institutions in the early 2010s faced rising management costs, the threat of federal tax laws, which could potentially diminish some benefits associated with charitable trusts, and decreased investment returns.

Organization and Structure

A trust is defined as a legal relationship in which one party holds title to property for the benefit of another. The arrangement involves the transfer of property by a "trustor" to a "trustee," who manages the property and issues benefits to the "beneficiaries." Although some companies, or trustees, specialize in trust management, most trustees are banks. Beneficiaries of a charitable trust may include any not-for-profit concern, such as churches, research institutes, schools, museums, governments, social or professional associations, and charity organizations.

In addition to cash, beneficiaries may receive such gifts as income-producing property, business inventory or equipment, securities, life insurance, works of art, real estate, or jewelry. Although the trustor typically donates property out of a sense of altruism, the trustee relationship may also provide a trustor with a reduction in tax liabilities. Charitable contributions are also sometimes used as an indirect means of transferring wealth among the trustor's family members, as well as to the beneficiary. A critical advantage that most trusts offer the contributor over other means of gift giving is the control a trustor can retain over the use of the donated property.

Trustee Responsibilities.
A financial institution or trust company acting as a trustee for a charitable contribution assumes many legal duties. A trustee is expected to exhibit skill and care in administration and management of property. It is also expected to be loyal to the beneficiaries and to protect the trust property from outside attack. Other responsibilities include keeping accurate records and reporting to the beneficiary when required to do so by the trustor. Most importantly, the trustee is obliged to carry out the wishes of the trustor in good faith.

Unlike all other forms of trusts, the conditions placed on a charitable trust are usually enforced by the federal government on behalf of U.S. citizens. In fact, the entire trust industry is closely regulated by the federal government. If the trustee violates his trust, by making an unlawful investment for instance, the beneficiary may reclaim the property.

In return for assuming responsibilities associated with trusteeship, the bank or trust company retains compensation from the property based on the amount of assets under management. For many banks, fees from trust services are of vital importance.

Types of Charitable Trusts.
Donors used a variety of trusts to transfer their wealth to nonprofit causes in the late twentieth and early twenty-first century. Each type of trust offered different advantages pertaining to the amount of control that the trustor could exercise over the gift, various tax benefits that could accrue to the trustor, and the method of compensation bestowed on the beneficiary.

In a charitable remainder annuity trust (CRAT), a fixed amount of property is periodically distributed to noncharitable parties, often including the grantor of the trust. After a recipient dies, the remainder of the CRAT then goes to a charitable organization. Among other advantages, a CRAT allows the grantor to receive charitable income tax deductions equal to the present value of the remainder interest ultimately received by the charity. These deductions are used to offset income from the trust during the grantor's life.

A wealth replacement trust is used in conjunction with a charitable gift. This complex type of trust is used to replace assets given to a charity while at the same time benefiting specific noncharitable parties, who are often family members of the grantor. The grantor may receive valuable tax benefits related to capital gains, gift, and estate taxes. Furthermore, survivors of the grantor's estate often benefit from reduced inheritance taxes.

Charitable lead trusts distribute income to charitable entities for a fixed term. At the end of the term the remainder of the trust is transferred to a noncharitable beneficiary, such as a spouse or child. One benefit of the charitable lead trust is that the grantor avoids estate taxes on the value of assets that defaults to the beneficiaries.

A pooled income fund is a trust maintained by a charitable organization. Each donor that transfers income to the pool may be eligible to receive significant income tax and gift tax deductions, as well as estate tax benefits. Charitable gift annuities, which became popular in the 1980s, bestow similar benefits on donors. This type of trust, however, is arranged so that the grantor receives a specified sum of money each year for the remainder of the donor's life.

Other charitable trusts include "bargain sales," in which a donor sells property to charities for below-market prices, and "charitable stock bailouts," in which a donor contributes closely held stock to a charity and derives various tax and business benefits.

Background and Development

Trust officers, or their equivalent, have been holding, managing, and caring for the property of others since around 4000 B.C., when the practice was common in Egypt. Various prototypes of trust institutions were later developed in second-century Rome, some of which involved the use of property for charitable purposes. The industry began evolving into its present form in eighth-century England, when clergymen served as executors of wills and trusts. Throughout the Middle Ages and the sixteenth and seventeenth centuries, trusts developed under English common law into a semblance of their present form.

The trust business in the United States can be traced back to around the early nineteenth century, when trusts began to serve the estates of wealthy businessmen and were used to transfer the wealth of some farmers. The first institution chartered to engage in the trust business was Farmer's Fire Insurance and Loan Company, founded in 1822. By 1840, several life insurance companies and financial institutions were involved in the industry. In 1906, Congress elected to allow banks to enter the trust business, and by 1920, about 1,300 banks offered trust services.

After the Great Depression, federal laws began to have a significant impact on the trust industry. The amount of money in trusts during this time escalated, despite the initial inconsistency of U.S. regulations pertaining to trusts. Also affecting trusts in the twentieth century were periods of inflation. For instance, a long period of inflation during the 1970s produced demand for higher returns on trust funds by beneficiaries and donors. As a result, many trustees began investing funds in riskier and shorter-term investment vehicles in an effort to remain competitive with other financial products and services.

The 1980s.
Charitable trusts experienced great growth during the early and mid-1980s, when assets in nonemployee benefit trust accounts jumped from $342 billion in 1980 to more than $614 billion in 1986. During much of this period, higher returns on market investments as well as tax advantages made trusts more attractive. The Tax Reform Act of 1986, however, proved a pivotal piece of legislation for trustees. The act created increased paperwork for many trustees, resulting in greater confusion and management expenses.

The increase in the number of available investment products also increased management expenses. Although trustee revenues climbed during the 1980s as charitable assets grew, increased costs outpaced income growth for many companies. Even a massive industry investment in computer automation during the 1970s and 1980s did not allow many trustees to maintain traditional profit margins.

To make matters worse, many banks began to experience severe financial distress in the late 1980s as economic recession and general mismanagement culminated in reduced profits from lending activities. Banks increasingly relied on income from services such as trust management to buoy income. As the industry became more competitive, profit margins on trust services were reduced for many companies. Trust managers knew that if they could not deliver competitive investment returns and deliver good service, they risked losing valuable trust clients to more efficient investment vehicles and tax shelters.

The 1990s.
In the early 1990s the charitable trust industry was benefiting primarily from two circumstances. First, Americans began donating more money than ever before to charitable causes. Whereas 1987 saw donations of more than $93 billion to charities, donations in the 1990s were estimated at well over $100 billion per year. This level of spending continued into the new millennium, with a growing portion of this spending directed to science-oriented projects, according to the American Association for the Advancement of Science (AAAS). The organization estimated that U.S. private foundations poured about $20 billion into charitable trusts in 1999.

Second, increases in taxes on the wealthy and a reduction in tax loopholes, which were a result of the Tax Reform Act of 1986, caused many people to consider charitable contributions as tax shelters. The results of growth in the industry following the Tax Reform Act of 1986 were reflected in employment by firms that specialize in managing charitable trusts. Despite hefty company investments in labor-saving automation, the number of people employed in the industry rose from about 22,000 in 1986 to about 40,000 by 1990. Similarly, the annual payroll of these firms increased from about $383 million to more than $726 million, which was a 90 percent increase.

Although greater amounts of money flowing into charitable trusts created a boon for many firms in the industry, trustees in the 1990s also faced potential obstacles. For instance, charitable trusts were threatened by legislation such as the generation-skipping transfer tax (GST). Although the GST had been in existence since the early 1980s, its impact was not realized until the 1990s, when families trying to transfer wealth through charities were penalized. Among other effects, the GST increased taxes on wealth passed to nonprofit beneficiaries through charitable trusts. Furthermore, in 1996 certain sections of the Income Tax Assessment Act 1936 were amended to restrict distribution of funds outside the United States. The amendment was applied to charitable trusts established after August 1996 and became effective after the 1996-97 income year. Apparently, this was a move by the government to prevent charitable trusts from being used as a means to recycle funds back to the trustor's beneficiary without tax penalty. Therefore, it was expected to have little impact on genuine charities.

In addition to a variety of legislative issues, some trustees were also fighting beneficiaries, who began to contest the traditional fee structure employed by most managers. Plaintiffs in lawsuits alleged that banks charging fees of 0.5 to 1 percent were receiving excessive compensation for what amounted to a few administrative duties. Beneficiaries of larger accounts, in particular, were suffering, and, according to the plaintiffs, the trustees were not acting in the interest of the beneficiary. Indeed, many heirs and beneficiaries of charitable trusts favored a free and competitive trust marketplace where accounts could be switched to trustees of their preference, a practice forbidden by federal regulations in the early 1990s.

In an effort to combat downward pressures on profit margins, trustees applied several tactics in the mid-1990s. In addition to reducing labor costs through automation, trustees stepped up their marketing efforts. Many also combined accounts to achieve economies of scale and to reduce transaction fees related to purchasing securities. Also, many companies experimented for the first time with tying trust officers' compensation to portfolio and department performance.

The Early 2000s.
Charitable giving remained strong into the new millennium, despite the poor economy. Indeed, the events of September 11, 2001, spurred charitable giving as Americans donated money to help victims of the terrorist attacks. Total charitable giving for 2001 totaled $212 billion, up 0.5 percent from 2000. Individuals accounted for 75.8 percent of that total; foundations, 12.2 percent; bequests, 7.7 percent; and corporations, 4.3 percent.

In 2001, donations largely went to religious organizations, which received $80.96 billion, up 4.5 percent from the previous year; education received $25.55 billion, up 0.5 percent; foundations and unallocated giving received $25.55 billion, down 15.8 percent; human services, $20.71 billion, up 15.1 percent; health, $18.43 billion, down 2.1 percent; arts and culture, $12.14 billion, up 5.6 percent; public society, $11.82 billion, up 2 percent; environment/animals, $6.41 billion, up 4 percent; and international affairs, $4.14 billion, up 13 percent. Giving related to the attacks of September 11 stood at $1.88 billion, or just under 1 percent of all giving that year, led overwhelmingly by individuals, who contributed $1.25 billion. Leading recipients of endowments were Harvard University, with $18.8 billion; Yale University, with $10.1 billion; and the University of Texas System, with $10 billion. In 2000, 78 percent of adults made donations, which rose to 80 percent in 2001. The average amount donated in 2001 was $1,097, compared to $886 in 2000.

With an increasing number of Americans becoming millionaires and billionaires at a relatively young age, philanthropy saw a surge from that demographic. Many of these newly wealthy also established family foundations. Family foundations gave $11.3 billion in 2000, which represented half of all foundation grant-making and controlled about half of all independent foundation assets, with $197.7 billion. The number of private foundations tripled in the prior decade to a record 48,000 in the United States. An article published by The New York Times on April 27, 2002, reported that the newly rich were responsible for a large amount of giving, which was predicted to total $40 to $136 trillion over the next 50 years. The estimates, provided by Professor Paul G. Schervish and John J. Havens at Boston College's Social Welfare Research Institute, also stated that by 2052 philanthropic spending could total between $19.2 and $50.2 trillion. Professor Schervish further predicted that up to $6.7 trillion will be donated to charities by 2020. Although possibly good news for charities, the professor speculated that much of that money would go to new philanthropic enterprises as opposed to established charities.

After suffering through the early 2000s, many charitable organizations struggled to meet fundraising goals. However, improvement in giving was seen in 2003, when total charitable contributions reached $236.73 billion. In 2004 giving overall rose by 5 percent with contributions totaling $248.52 billion. "After giving turned the corner in 2003, it continued to grow slowly but steadily throughout 2004," Association of Fundraising Professionals President and CEO Paulette Maehara noted in an association press release in June 2005. "While it wasn't a banner year like those in the late 1990s, many organizations finally saw some positive increases in 2004 after two difficult years."

Of 2004 total contributions of $248.52 billion, 35.5 percent ($88.3 billion) went to religious organizations; 13.6 percent ($33.84 billion), educational institutions; and 9.7 percent ($24 billion) to foundations. Nearly 76 percent ($187.92 billion) of all charitable donations came from individuals, with foundations providing 11.6 percent ($28.8 billion) and bequests and corporations providing 8 percent ($19.8 billion) and 4.8 percent ($12 billion), respectively.

According to a survey released by Freelanthropy, a nonprofit services firm, in 2005, 90 percent of American made a donation to a nonprofit organization in 2004. According to the survey, 42 percent of Americans gave between $100 and $1,000 to charity during the year. Givers of less than $100 totaled 24 percent; between $1,000 and $5,000, 18.5 percent; between $5,000 and $10,000, 4.4 percent; and more than $10,000, 1 percent. While people aged 25 to 34 ranked education as their top charitable cause, people over the age of 65 were the main supporters of religious affiliated organizations.

Investment returns for charitable organizations and foundations improved significantly during the mid-2000s. After suffering average fund losses of 8.7 percent in 2002, returns jumped by 17 percent in 2003 and increased another 11.4 percent during 2004. The smallest funds, which had less than $100 million in assets, showed the strongest returns, with 11.8 percent. The largest firms, with more than $1 billion in assets, recorded a 10.7 percent increase in returns.

After the upheaval caused by the American Red Cross's slack handling of donations following the terrorist attacks of September 11, 2001, charitable organizations were working hard in the mid-2000s to increase transparency. Efforts such as the American Institute of Philanthropy's Charity Rating Guide and Watchdog Report and Philanthropic Research Inc.'s GuideStar.com offered donors the opportunity to research a charity's use of funds, history, and administrative structure.

Improving oversight was high on the agenda for the industry during the mid-2000s, following several high-profile scandals in the for-profit sector. In 2005 the Senate Finance Committee considered reforms that would require compliance reviews every five years. In addition, the Internal Revenue Service revamped its nonprofit reporting system to ferret out more abusers, and numerous states' attorneys general were considering new regulations. For example, California passed the Charity Integrity Act of 2004 that served a similar function to the Sarbane-Oxley Act of 2002, which regulated publicly held companies. Such provisions required mandatory independent audits, governing board reviews (including executive compensation), whistle-blower provisions, and certified financial statements.

Current Conditions

Despite the economic recession of the 2000s and its effects on charitable giving, the number of nonprofit, charitable organizations continued to increase, reaching almost 1.24 million in 2009, according to the Giving USA Foundation. The nation had started the decade with about 819,000 of these organizations. An issue of concern, however, was the new tax law initiated by the Internal Revenue Service in 2006 that required organizations to file an informational return annually or, after three years, have their nonprofit status revoked. According to The New York Times as reported by the Giving USA Foundation, as many as 400,000 nonprofit agencies were at risk of losing their nonprofit status as of April 2010 because they did not know or understand the new requirements.

The overall charitable trust industry was hoping for a recovery as 2010 neared a close. One trend that was impacting the industry was the growth in online giving. According to the Blackbaud Index of Online Giving, industry revenue from online contributions increased by 20.4 percent for the three months ending August 2010 as compared to the same period in 2009. This trend was expected to continue.

According to the National Center for Charitable Statistics, the largest public educational charity in 2009 was Harvard University, which had total assets of $63.5 billion. Others in the top five were Yale University, Stanford University, Princeton University, and Massachusetts Institute of Technology.

Industry Leaders

The top charitable foundation at the end of 2008, according to Pensions & Investments, was the Bill & Melinda Gates Foundation, with $38.9 billion in assets. Second was the Ford Foundation, with $13.7, followed by the J. Paul Getty Trust, with $10.13 billion; the Robert Wood Johnson Foundation, with $10.10 billion; and the William and Flora Hewlett Foundation, with $9.2 billion. Rounding out the top 10 were the W. K. Kellogg Foundation, the Lilly Endowment, the David and Lucile Packard Foundation, the Andrew W. Mellon Foundation, and the Gordon and Betty Moore Foundation.

During the financial meltdown of the late 2000s, some of the nation's largest providers of trust services were bought out by financial conglomerates. Bankers Trust Corporation, which had been one of the largest providers of trust services in the nation, was acquired by Germany's Deutsche Bank A.G. JP Morgan Chase & Company bought Washington Mutual and Bear Sterns in 2008. Other large trustees included Citicorp, Comerica Inc., State Street Corp., and Northern Trust Company.

Workforce

During late 2000s, most of the firms that specialized in managing trusts for religious, educational, and other nonprofit trusts were small companies. However, as companies in the industry followed a pattern of consolidation through mergers and acquisition, the number of large companies and their percentage of industry assets under management continued to increase as the percentage of smaller companies declined.

Jobs in the charitable trust industry exist primarily with banks and trust companies. Trust departments hire trust officers and support staff to manage investments, handle reporting and record-keeping activities, market trust services to potential grantors, and distribute benefits.

Research and Technology

As the cost of managing charitable trusts grew with increased regulation and investment requirements, trust managers turned to automation and advanced information systems to hold profit margins steady. In the late 1970s and 1980s companies reduced costs related to labor such as data entry and basic accounting tasks. By the late 1980s and early 1990s, advanced systems were automating more detailed tasks, such as maintaining asset inventories, making disbursements to beneficiaries, calculating dividend payments and printing checks, trading securities, and filing tax information.

New image technology began to be used in banks and trust departments in the 1990s. Using these advances, trust administrators were able to reduce paperwork and reporting tasks by scanning forms and reports into their computers. The images were then automatically filed and processed by the computer system and made available for easy access at a later date.

The events of September 11, 2001,, caused a huge surge in online donations and thus inspired America Online Inc., Cisco Systems, Yahoo Inc., and others to back a new web site, Network for Good (www.networkforgood.org), launched in late 2001 and designed to be a central-point online portal to encourage charitable giving to numerous causes. Online donations related to 9/11 made up 15 to 20 percent of all donations, with a significant number of individuals using the Internet to give for the first time. By November 2010, Network for Good had raised more than $430 million for 50,000 different nonprofit organizations.

In the 2000s and early 2010s, web sites played an ever-increasing role in both providing information and soliciting donations. According to the Kintera/Luth Nonprofit Trend Report, some 8.6 million Americans made donations online totaling $3 billion in 2004, up 50 percent from 2003. Although this accounted for only 1.2 percent of total philanthropic giving, online contributions were expected to become increasingly significant to organizations. According to the report, more than 65 percent of people who made a donation first visited at least one of the web sites of the causes they financially supported and 40 percent claimed to always peruse the web site before deciding whether to contribute.

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