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Board Duties Part II – The Duty of Loyalty

August 10, 2010

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In the first installment of this series on board duties, we briefly discussed the fiduciary duty of care.  This second installment briefly discusses the fiduciary duty of loyalty.  To satisfy the duty of loyalty, a board member must act in the interest of the charity, and not act in their own interest or that of another person or entity.

The duty of loyalty primarily relates to conflicts of interest, corporate opportunity, and confidentiality. A conflict of interest is present whenever a director has a personal interest, whether direct or indirect, in connection with any proposed contract, arrangement or transaction. The mere presence of a conflict of interest, however, does not necessarily render a transaction void or voidable, or expose a director to liability.  When faced with a potential conflict of interest transaction, the board should consult the Internal Revenue Code (IRC Section 4941 or IRC Section 4958) and applicable state

Board Duties Part I – The Duty of Care

The board of directors of most charities are made up of good-hearted volunteers who are passionate about the charity’s exempt mission and eager to donate their time and experience.  Before agreeing to serve, however, a potential board member must understand the fiduciary duties that they will owe to the charity as a member of the board, including the duty of care, duty of loyalty, and duty of obedience.   The following is a brief overview of the duty of care.  A brief discussion of the duty of loyalty and duty of obedience will follow in subsequent blog entries.   

To satisfy the duty of care, a board member must discharge his or her duties as a director in good faith, with the care of an ordinarily prudent person and in a manner the director reasonably believes to be in the best interests of the charity.  This means, among other things, the director should

Say Thank You… But For How Much?

Last week, my husband and I attended an event for one of our favorite charities. For a $160 donation, the two of us enjoyed a nice steak and lobster dinner and an open bar. This was a great deal for the charity – since all of the food and drinks had been donated. At the silent auction, I successfully bid on a dinner party for 4, hosted by a famous local chef who donated the item. And I got a great deal on that dinner – it normally goes for $300, and all I paid was $150! My husband won the raffle – for five dollars, he entered for the chance to win all of the money in the pot, and scored a whopping $510! Of course, being the charitable person that he is (and with a bit of urging), he donated the entire amount back to the charity. Finally, after watching the

Math and Stand-up Comedy: Filling out your IRS Forms

August 3, 2010

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My wife and I try to teach certain lessons to our kids.  For example, my eight-year old son is good at math and science; this is true despite his father being in a profession that is notoriously chosen by people who are bad at both math and science.  But, despite not inheriting my ineptitude for numbers and symbols, he did inherit my grade-school propensity to rush work and make silly mistakes.  Signs of this have included adding instead of subtracting or failing to even attempt problems on the back of a page.  So, we have encouraged him (and some mistakes on graded work have also encouraged him) to be more diligent in double-checking his work.   Another thing we have tried to teach our kids is to be honest–at school and otherwise.  My favorite comedian, Brian Regan, has a humorous bit (available here, though I think it’s funnier to just listen and ignore the stick

Charitable Gaming Overview

Charitable Gaming Overview

August 2, 2010

Authored by: Keith Kehrer

As contributions and grants have decreased, many organizations must get creative to raise the necessary funds to further their exempt purposes.  One common method of raising additional funds includes gaming activities, such as raffles, sweepstakes, contests, and 50-50 drawings.  Before engaging in any gaming activities, however, it is critical for your organization to analyze applicable state and federal law.   For example, certain gaming activities are strictly prohibited under state law (e.g., such activities may constitute an illegal lottery).  Certain gaming activities may be permitted but are often limited to specific organizations, such as Section 501(c)(3) organizations.  In addition, most states impose registration, licensing, and reporting obligations before an organization may conduct gaming activities.  It is important to consult with a professional familiar with each applicable state’s laws before conducting gaming activities. 

With respect to federal tax law, the IRS warns that “[a]ll exempt organizations conducting or sponsoring gaming activities, whether for one night of the year or throughout the year … must

“Shark-Fin” Charitable Lead Annuity Trusts

Typically, a charitable lead annuity trust ( a “CLAT”) provides for level annuity payments to the charity during the trust’s term.  For the trust to be effective in transferring value to the remainder beneficiaries, who are usually family members, the total return inside the trust must exceed the required annuity payments; otherwise, such payments will consume the entire value of the trust’s assets and no property will then pass to the remainder beneficiaries.  A “Shark-Fin” CLAT is designed so that small payments, such as $1,000 per year, are made in the early years of the trust term, with a very large payment required in the last year or two. By proceeding in that manner, fluctuations in value of trust assets in the early years become less of a factor in assuring assets will be available for distribution at the end of the term.

A CLAT may be designed as a grantor trust, providing a

Should your nonprofit organization obtain D&O Insurance?

July 28, 2010

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We frequently get asked by new and existing nonprofit organizations about directors and officers liability insurance (“D&O Insurance”). Should you obtain coverage? Is it worth the cost?

Yes, you should explore obtaining D&O Insurance. If you want to recruit high-quality directors, you may find that they will not serve on your board without seeing a copy of your policy. They want to know that they will be protected. In addition, their employers may not allow them to serve on your board unless you have D&O Insurance.

On a related note, you might also want to review your organizational documents for provisions that indemnify your directors and officers against certain acts. The same potential directors who want to see a copy of your D&O Insurance policy may also want to see your indemnification provisions.

There are a number of organizations, some of them nonprofit themselves, that provide affordable D&O Insurance to

IRS Provides Relief for Small Organizations that Failed to File Form 990

July 26, 2010

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Tax-exempt organizations that fail to file Form 990 (including Form 990-EZ and Form 990-N) for three consecutive years will automatically lose their tax-exempt status.  The IRS announced today that it is providing one-time relief to small charities to file a delinquent Form 990-N or Form 990-EZ and retain their tax-exempt status even though they failed to file for three consecutive years.  This one-time relief is available for Form 990-N (e-Postcard) and Form 990-EZ filers only. 

Small organizations that are required to file Form 990-N (e-Postcard) and whose Form 990-Ns are due on or after May 17 and on or before October 15 can maintain their tax-exempt status by filing the delinquent Form 990-N by October 15, 2010.

Other small organizations who are eligible to file Form 990-EZ (but not the Form 990-N) can use a one-time voluntary compliance program (VCP) to come back into compliance. To be eligible

IRS Grants Foundation Additional 5 Years to Dispose of Excess Business Holdings

The excess business holdings rules (IRC Section 4943) limit the stock a private foundation may hold to 20 percent of a corporation’s voting stock less stock held by its disqualified persons (including trustees, directors, officers, and their family members).  A special rule gives a private foundation five years to dispose of any stock that constitutes an excess business holding if it was acquired by gift.  In light of the current economy, private foundations may find it difficult to dispose of excess business holdings within this five year period without selling for a substantial discount.  

Fortunately, an additional five years may be granted if (1) the foundation made diligent efforts to dispose of the stock, (2) disposition within the initial 5-year period has not been possible, except at a price substantially below fair market value, by reason of such size and complexity or diversity of such holdings, (3) prior to the expiration of the initial

August 2010 Interest Rates Indicate a Great Time for a Charitable Lead Trust (“CLT”)

The rate that the IRS uses to calculate the present value of an annuity has dropped to 2.6% for August. This is historically a very low rate, as just two years ago the rate was 4.2% and within the last decade the rate reached 8.2%. Clients are generally aware that such low rates present estate planning opportunities for vehicles such as Grantor Retained Annuity Trusts, where the ability of the trust to obtain an investment yield higher than 2.6% presents real family wealth transfer opportunities. However, clients with charitable intentions need to be aware that the same low interest rate is of substantial benefit in family wealth planning involving CLTs.

A CLT is both a family wealth transfer vehicle, as well as a charitable giving vehicle. A trust is established which pays an annuity to charity for a period of years, and at the end of that term of years,

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