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Common sources of charitable trust litigation

As this blog has reminded its Minnesota readers many times, trust litigation does not necessarily have to be between family members. Oftentimes, residents of Saint Paul may want to set up a charitable trust that will benefit a person's favorite house of worship, cultural site or nonprofit organization. As with other trusts, sometimes things can go awry and end up in litigation or a sticky legal situation.

For example, a trustee of a charitable trust has an obligation to invest the funds in the trust so that it enjoys reasonable economic growth. If a trustee does not spread out the trust's investment portfolio, then he or she could run in to legal hot water. Generally speaking, a trustee must do with the trust funds what a prudent investor would do, and this ordinarily means having a broad range of investments.

On a related point, litigation can also arise when a charitable trust does not have a built in investment plan for how a trustee is supposed to invest trust assets or what the ultimate investment goal of the trust ultimately is. When there is no concrete goal, trust administration is difficult, because interested parties are free to disagree as to whether a trustee has been prudent in his or her investments.

Finally, litigation can be the end result if a trustee does not distribute the funds in the trust exactly in accordance with what the trust document specifies. Not doing so can mean not only that a charity or other heirs feels shortchanged but also that the Internal Revenue Service may revoke a charitable trust's tax-protected status.

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Mason & Helmers
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