Delegation of Investment Powers by Charitable Trustees

Over the past few years the activities of philanthropic organizations have been undergoing considerable critical scrutiny. Congressional committees, private commissions, and individuals have extensively analyzed institutionalized charity. An area of particular concern involves problems created by the investment policies of charitable organizations. One investment problem that has not received much attention, however, is the plight of the natural person trustee of a charitable trust who, in general, is legally prohibited from delegating his responsibility for investment of trust funds. Almost one-third of all charitable foundations take the legal form of trusts. Of the foundations organized as charitable trusts, over 60 percent are administered by natural person trustees. Therefore, any investment problem of the natural person trustee, such as an inability to delegate investment responsibility, is faced by the great majority of charitable trusts. The economic effect of poor investment policy is significant since “each percentage point of added total return on foundation investments would yield between two and three hundred million dollars of additional funds for charity.” The ultimate loser is society, since smaller return on investment means a smaller payout for charitable purposes. Private foundations can no longer resign themselves to a low investment yield resulting from a lack of investment expertise. The Tax Reform Act of 1969 has made maximum investment yield and a high rate of income distribution imperative, for an inefficient investment policy now subjects the charitable trust to a prohibitive tax burden. Thus, not only society’s interest, but also the continued functioning of the charitable trust necessitates expert and aggressive management of the trust’s principal and income by the trustees. Refusal to allow the charitable trustees to delegate their investment responsibilities to knowledgeable investment counsel could impede efficient management.