SIC 6732
EDUCATIONAL AND RELIGIOUS TRUSTS



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.

NAICS Code(s)

813211 (Grantmaking Foundations)

Industry Snapshot

Charitable giving is closely tied to the economy, with giving falling between 1 percent and 5 percent during six of the eight recession years since 1971. Despite a poor economic climate in 2001, giving remained little changed, with Americans donating $212 billion to charity, up 0.5 percent from $210.9 billion in 2000. Giving $160.7 billion, or 75.8 percent of the total amount given in 2001, individuals were by far the largest percentage of givers. Individual giving was up 1.1 percent from 2000. Foundation grants also rose in 2001, up 5.4 percent to $25.9 billion. Corporate giving, however, declined 12.1 percent during the same period, to approximately $9.1 billion. Bequests, another category in giving, also fell by 4.5 percent to $16.3 billion. Giving related to the relief and recovery involved in the September 11th terrorist attacks totaled $1.9 billion, just under 1 percent of total giving in 2001. Individuals contributed the most to 9/11 causes, with $1.3 billion, followed by corporations, with $410 million, and foundations, with $195 million.

Although banks provided most of the management services for charitable trusts, other institutions were competing with banks in the 1990s and 2000s for control of the endowment management industry. In addition, trust departments at all financial institutions were facing rising management costs, the threat of federal tax laws, which could potentially diminish some benefits associated with charitable trusts, and decreased investment returns resulting from economic recession.

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 1990s. 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 the 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, the 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.

The 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—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, where 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 about 150 years, 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. The greatest growth in charitable trusts occurred during the early and mid-1980s, when assets in nonemployee benefit trust accounts jumped from $342 billion in 1980 to more than $614 billion by 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 recess 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, 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 are 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—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 such legislation 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 to 1997 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 going into 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.

Current Conditions

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 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 9/11 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 2000 was $886, compared to $1,097 in 2001.

The top charitable foundation at the end of 2001 was the Lilly Endowment Inc., which had about $15.6 billion in assets. Rounding out the top five were the Bill & Melinda Gates Foundation, with $15.5 billion in assets; the Ford Foundation, with $14.6 billion; the David and Lucile Packard Foundation, with $13.1 billion; and the J. Paul Getty Trust, with $10.9 billion.

With an increasing number of Americans becoming millionaires and billionaires at a relatively young age, philanthropy is seeing a surge from that demographic. Many of these newly wealthy are also establishing family foundations. Family foundations gave away $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. Private foundations tripled in the last 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 could 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 over the next 16 years. 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.

Industry Leaders

Throughout the 1990s, Bankers Trust New York Corporation was one of the largest providers of trust services in the nation. The corporation managed more than $200 billion of nonemployee benefit trust assets for more than 350 clients. The company's trust department offered a wide range of services, including performance measurement; portfolio management, analysis, and review; record keeping and benefit disbursement; tax accounting; and international investment services. At the end of the decade, this major New York banking institution was acquired by Germany's Deutsche Bank A.G. in a move that made the latter the largest bank in the world.

Chemical Bank of New York was another major trustee in the 1990s. It managed nonemployee benefit trust assets of more than $65 billion for 469 clients. Later in the decade, Chemical Bank purchased the Chase Manhattan Bank Corporation, which managed some $62 billion in nonemployee benefit trust assets, and took the Chase name as its own. Other large trustees included Citicorp of New York, which managed $38 billion in nonemployee benefit trust assets, Comerica of Detroit ($41 billion), State Street Bank and Trust Company of Boston ($160 billion), and Northern Trust Company of Chicago ($148 billion).

Workforce

During the 1980s, most of the firms that specialized in managing trusts for religious, educational, and other nonprofit trusts were small companies; in the early 1990s, more than 3,000 of the 4,000 companies that served the industry had fewer than 20 employees. However, as companies in the industry followed a pattern of consolidation through mergers and acquisition, the number of large companies began to increase in the 1990s 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. In the 1990s, trust officers at large banks earned $35,000 to $45,000 on average, whereas their counterparts at small and midsize banks earned about $28,000 to $38,000. Trust support staff earned $20,000 to $30,000 on average. Senior trust officers averaged approximately $100,000 per year, and trust investment officers averaged about $47,000.

Positions in the charitable trust industry are expected to increase faster than the average for all U.S. industries through the year 2005. Although new tax laws may diminish advantages associated with transferring wealth to nonprofit beneficiaries through charities, a generally inhospitable tax environment will likely keep charitable trusts attractive. The general increase in charitable giving should also expand the industry. Growth should occur in computer programming and information systems jobs, which are projected to increase more than 100 percent by 2005. Sales and marketing positions for trust services should also realize disproportionate increases.

Research and Technology

As the cost of managing charitable trusts has grown with increased regulation and investment requirements, trust managers have turned to automation and advanced information systems to hold profit margins steady. In the late 1970s and 1980s companies reduced costs related to such labor as data entry and basic accounting tasks. By the late 1980s and going into the 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 was beginning to be used in banks and trust departments in the 1990s. Using these advancements, 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 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.

Further Reading

"Attacks, Recession Take Slight Toll on Charitable Giving." Association Management, October 2002.

"Charitable Donations Rise in 2001 After Earlier Decreases." Research Alert, 19 April 2002.

"Charitable Giving Changed Little in 2001, Despite Economic Woes, 9/11." Research Alert, 2 August 2002.

Cohen, Jon. "Science Funding: Philanthropy's Rising Tide Lifts Science." Science, 8 October 1999.

Hermann, William. "Arizonans Glad to Aid Charities; Report Tracks Giving Around Country." Arizona Republic, 20 December 1999.

"Hoover's Company Capsules." Hoover's Online. Austin, TX: Hoover's Inc., 2000. Available from http://www.hoovers.com .

Krebsbach, Karen. "The Changing Face of Philanthropy." Financial Service Marketing, 12 March 2002.

Strom, Stephanie. "The Newly Rich Are Fueling a New Era in Philanthropy." New York Times, 27 April 2002.

Suzukamo, Leslie Brooks. "Charitable Giving Online Gets A Central Checkpoint." Chicago Tribune, 3 December 2001.

"2001 Databook: Endowments: Top 50 Endowments." Pensions & Investments, 24 December 2001.

"2001 Databook: Foundations: Top 50 Foundations." Pensions & Investments, 24 December 2001.



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