Protecting Charitable Gifts from Creditor’s Claims

Giving money to a church, Christian work or other charity usually requires trust.  You are trusting that the gift be used for the designated purpose.  Many folks want to be generous, but what happens if that trust is broken?

Trust is a legal concept and the action of trusting someone forms the basis of what is called a “trust” in law. Legally, a trust occurs when one person (the settlor) gives something, such as money or property, to another person (the trustee) to hold for the benefit of a third person (the beneficiary). This happens when someone dies and leaves money in trust for a minor or when someone makes a charitable gift to a charity for a specific purpose.

However, many charitable givers became very concerned about how, a few years ago, the courts threatened the concept of trust.  It was the Christian Brothers of Ireland case in which the court was asked to determine whether certain charitable assets, including Vancouver College, which had been given to a charity for a specific purpose, could be used to satisfy the abuse victim creditors of the insolvent charity, or whether the charity held these assets in trust for the specific charitable purposes of the donor, and outside the reach of the creditors. The court concluded that, even if a donor had designated a specific purpose for their gift to a charity, the gifted property could be used to satisfy the bankrupt charity’s creditors.

The result of this decision was to betray the trust of the donor who makes a charitable donation exclusively for a specific purpose. According to the court’s decision the directors of a charity would be forced to break the trust their donors have placed in them, and use the donors’ gift to satisfy the claims of creditors instead of the specific purpose for which the gift was originally intended.

But the British Columbia government recently created the Charitable Purposes Preservation Act to overturn the court’s conclusions.  It seeks to protect a donor’s intent and restore the trust of charity supporters when they make a charitable donation for a specific purpose. The Act protects a gift given to a charity for a specific purpose so long as several requirements are met.   The donor must intend and the charity must ensure that the gift be (1) kept and administered by the charity separately from any other property, and (2) used exclusively to advance the specific purpose rather than to assist or the support the charity generally.   If a gift meets these requirements it cannot be used to satisfy the debts or liabilities of the charity, except to further the specific purpose of the gift.

What is unusual about this legislation is that it applies retroactively.  Therefore all donations made in the past that fulfill the Act’s requirements will be protected in the future. However, since no other province has followed British Columbia’s lead at this point, it is uncertain how the Act will apply to situations involving donors and charities not entirely within British Columbia.

This legislation goes some distance to restoring and protecting the trust of those giving to charities and churches for specific purposes.  Now both charities and donors can safely plan how to structure charitable gifts for specific purposes to ensure protection from creditors and to retain each other’s trust.

This article was written by Robert G. Kuhn and Ian C. Moes, lawyers who practice in charity and not-for-profit law with the law firm of Kuhn LLP. It is only intended as a guide and cannot cover every situation. It is important to get legal advice for specific situations. If you have questions or comments about this case or other construction law matters, please contact us at 604-864-8877.