Presenters Thomas R. Conklin - Attorney & Counselor, Sarasota, FloridaKaren Noble Hanson, CFO Diocese of RochesterKate Adams, Vice President of Program, Episcopal Church Foundation

The Roosevelt Hotel, New York CitySeptember 27 – 30, 2010

•Wills and Trusts:Best Practices for Congregations and

Dioceses

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Thomas R. Conklin: Recent Experience

• Twenty years of experience in the practice of law in estate planning including estate and trust administration.

• Specializes in the development of wills, trusts and related tax issues.

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Kate Adams

• Vice President of Program, Episcopal Church Foundation

• Church Pension Group

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Canon Karen Noble Hanson

• Diocesan CFO and Canon for Finance, Resources and Community Development since 1999

• More than 25 years in Commercial Real-estate and Government and Private Financing.

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GOALS OF THIS WORKSHOP

• Discuss Best Practices for Churches and Dioceses that have any Investments and/or endowments

• Share some recent IRS and bank issues that will likely affect one or more of your churches and/or the Diocese.

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INCLUDED IN YOUR PACKETS

• CD with Today’s Presentation• Information on Pension Protection Act• Sample Letters • Outline for Best Practices• Model Investment Policy and Procedures

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Letter and Forms Sent From Episcopal Church Foundation

• Recently the ECF sent a letter to Bishops and Administrators (copy in your material) along with some useful attachments

• The letter outlined much of what you will hear today about the PPA and the effort undertaken by the Rochester Diocese to raise awareness about these trust issues.

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WHAT INVESTMENTS DO YOU AND YOUR CHURCHES HAVE?

Examples are :• Operating Funds• Savings Accounts• Columbarium Funds• Special Purpose Funds• Restricted Gifts• Unrestricted Gifts• Endowment• Trusts and Other

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WHAT ARE BEST PRACTICES?

When we talk about Best Practices for financial management we want to be sure to include all forms of financial assets. Our definition for this workshop would be as follows:

“Best Practices” would mean the gathering of all information on financial assets, knowing how they are held or invested, proactively meeting with those in whose care the money resides, reviewing the safety and return being received and having policies regarding the use of and investment of all assets.

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AssetName

Bank andAccount #

Contact Purpose Amount

Operating

Savings

SpecialPurpose

Restricted

Endowment

Trusts

Other

Other

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Name ofAccount

$Date

Fees for Period

Interest Net

Savings, Operating, Short-Term Investments

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All Forms of Investments Need to be Monitored

• Short-Term Investments• Investments Managed by the Church and by

Others• Endowments• Trusts

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Best Practices

• All organizations with Investments need policies regarding their management.

• A typical set of investment policies is included on the CD you received.

• Also needed are Investment procedures defining how you wish to have money invested

• The policies will direct how often and with whom your organization will meet

• Once you have policies you can begin to determine who will manage these policies

* If Church Wardens and Vestries and Diocesan Trustees do not manage funds and/or do not provide for appropriate Directors and Officers Liability Insurance, they might risk liability. Appropriate Insurance would be Church Agency of Vermont or of New York.

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Selecting an Investment Manager (s)

• Investments and Endowments Should be Managed by Qualified Individuals who do not have a conflict of Interest with the Diocese or the Congregation

• Investment Management Can Be by:A Committee Of Your Diocesan TrusteesAn Investment Management Firm or

Organization with experience.A Consultant With Relevant Management

Experience.The Episcopal Church Foundation

• You May Wish to Issue an RFP for Management Services (an Example RFP is on your CD)

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Working With The Management Team

• Managers May Manage Certain Types of Assets (Small Cap, Large Cap, International Equities, Bonds, etc) or

• a Single Manager May Manage the Entire Portfolio.

• When Selecting a Manager (s), be Clear that you Expect regular (perhaps quarterly) statements and Meetings.

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Kate Adams: Episcopal Church Foundation I

• Annual Stewardship• Capital Campaigns• Planned Giving• Endowment Management Services• Episcopal Academy/Workshops• Diocesan Partnership Program• Funding Future Ministry• Vestry Resource and other Guides

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Episcopal Church Foundation II

• Annual Stewardship• Capital Campaigns• Planned Giving• Endowment Management Services• Episcopal Academy/Workshops• Diocesan Partnership Program• Funding Future Ministry• Vestry Resource and other Guides

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Episcopal Church Foundation III

• Annual Stewardship• Capital Campaigns• Planned Giving• Endowment Management Services• Episcopal Academy/Workshops• Diocesan Partnership Program• Funding Future Ministry• Vestry Resource and other Guides

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Endowment Management Services

• Endowments support exciting new ministries today, and secure resources for ministry for generations to come.

• ECF helps Episcopal dioceses, churches, organizations, and schools organize, invest and grow their endowments and permanent funds.

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Episcopal Church Foundation IV

• Annual Stewardship• Capital Campaigns• Planned Giving• Endowment Management Services• Episcopal Academy/Workshops• Diocesan Partnership Program• Funding Future Ministry• Vestry Resource and other Guides

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Sample Policies and Guidelines

• Whether you are just getting started, or you need to refine and update current policies, ECF will evaluate your endowment structure and share sample endowment fund policies and guidelines.

• These policies and guidelines include:• 1. Enabling Resolution• 2. Gift Acceptance Policy• 3. Disposition of Bequests Policy• 4. Designated Funds Policy• 5. Spending Rules• 6. Investment Guidelines

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Tom Conklin: The Trust Issue

• What is a Trust• What is Going on with the IRS?• What Can a Diocese Do?• What Has Changed?• Why Does It Matter?

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Determine if Diocese and Parishes have Trusts

• Funds given by persons years ago were for the programs and operations of churches

• Usually the local Trust company was the chosen vehicle to form the Trust and manage it

• Over time, these local banks and Trust Companies have merged, leaving the locals to manage the funds

• Today they banks and trust companies are changing the status of these trusts, without the permission of the beneficiaries

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Simple Way Of Determining If The Diocese Or A Church Has A Trust

• If a Bank or Trust company manages funds for the organization, and these funds cannot be moved to another Bank or Trust Company, you likely have a Trust.

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Summary of Laws Regarding Trusts and Willsand

Best Practices for our Congregations and Dioceses

Charitable Trusts: What are they? Classification before and after the

enactment of the Pension Protection Act of 2006

(Pub. L. No. 109-280, 120 Stat. 708 (2006) (the “PPA”)

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Bank Trustees Changed Reporting Status in 2008

• Trustees First Reported Under PPA for the 2008 Tax Year• Most made changes to the Status of Trusts

and filed as Private Foundations.• You or your churches may have received a letter from the

Trustee informing of this decision.• Many organizations did not object to the change in status

because they did not understand the consequences

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Diocese of Rochester, New York

• Diocese has several trusts as do parishes within the Diocese.

• As we became aware of changing laws effecting Trusts, the Trustees, set up a program to explore policies and tax handling of various trusts, wills and related Diocesan and congregational investments.

• The Diocese reviewed and revised investment policies and procedures

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How The Diocese Proceeded

• Determined If The Diocese Had Charitable Trusts and Gathered Information on Them

• Gathered Information on each congregation’s Investments, whether Trusts or otherwise

(Letter to congregation and forms in packet and on CD)

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Why it Matters

If You Don’t Meet The Tests For A Charitable Trust It Will Be Classified As A Private

Foundation 1. Private Foundations pay 2% excise tax2. It costs more to report to IRS as a Private

Foundation

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Supporting Organizations: Some Background

• Type I and Type II supporting organizations

• Type III supporting organizations• Banks Reclassified most Trusts AND

they are now paying 2 % excise tax on Trust Income

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IRS Realized That Banks Were Reclassifying In Error

• IRS Provides Relief for Certain Charitable Trusts •  Announcement 2010-19 provides procedures that a charitable

trust may follow to: terminate its private foundation status by showing that it

continuously operated as a Type III supporting organization after August 16, 2007

Obtain a refund of excise tax paid for the 2008 tax year.• These procedures are available to trusts that :

were classified as a Type III supporting organization prior to enactment of the PPA; and

continued to meet the requirements to be classified as a Type III supporting organization through the end of their 2008 taxable years (including by meeting the significant voice responsiveness test for periods after August 16, 2007.)

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What Criteria is Needed to Revert To Type III?

Beneficiary Must Have a Significant Voice in The Trust

The proposed regulations require that all Type III

supporting organizations demonstrate that the

officers, directors or trustees of the supported

organization (church or diocese) have a

significant voice in the operations of the

supporting organization (Trustee).

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The Significant Voice Test

• Requires the Trust Beneficiary to have the following: 1. a significant voice in the investment policies of

the trustee2. The timing of the trust’s payment to the

beneficiary3. Direction over the use of income or assets of the

trust.

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What is a Significant Voice?

An Example

Cutler is a trust created under the last will and testament of Mrs. Cutler

The Trustee is a bank.

The Trust benefits the Diocese of Rochester.

The Trustee has discretion regarding the timing and amount of

distributions but the Diocese has a significant voice in this, giving the

Trustee an expected schedule annually.

Trustee and Diocese have quarterly face to face meetings, the Diocese

discusses its need for support, and the Trustee discusses its

investment strategy. The Trustee provides the Diocese quarterly

statements.

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What Options Do We Have Now?

• Determine What Has occurred.• If Status has not changed: Still a Charitable Trust• If Status has changed: Prove Significant Voice and

Revert to Charitable Trust Now (Cutler)• Establish Responsiveness Over Time (5 Years)• Collapse Trust with AG agreement• Forget it all and pay 2% excise the tax on income.

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What Should We Do Next and

How Do We Know What the Bank Has Done?

• Request a copy of the 2008 tax return from the Trustee

• Determine if they filed as a Charitable Trust (IRS form 990) or a Private Foundation (IRS form 990 PF)

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Was Private Foundation, IRS Form 990 PF, Filed in Error?

Discuss With the Trustee

• If yes, it was filed in error:1. IRS allows a Trustee to file an amended tax return

and request a refund of the excise tax.2. And request a ruling from the IRS that the trust is

not a private foundation by filing a statement which documents that the trust meets the significant voice test.

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Steps Required to Request That the Trustee File an Amended Return

• Contact the Trustee• Discuss and gather information that is

needed to prove significant voice• Three years evidence, minutes, notes, or

other evidence of involvement with the Trustee in the investment policies of the Trustee, the timing of the trust’s payments to the beneficiary, and direction over the use of the income or assets of the trust.

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Was Private Foundation, IRS Form 990 PF, Filed in Error?

• No, it was not filed in error:1. This means that the beneficiary cannot meet the

significant voice test. 2. Under this circumstance, the IRS grants the

Trustee the option to file a statement with the IRS that the trust intends to convert from a private foundation to a charitable trust and that it will operate as a charitable trust for 5 years and then request a ruling from the IRS that the trust is not a private foundation.

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The Five Year Plan

• It is critical that you undertake this plan with the Trustee. They may resist as they have many Trusts. However, they may be willing to collapse the trust, provide greater returns and work with you to a greater benefit of the church or diocese.

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If Your Status Has Changed: Act

• Trusts that were formed from a simple will, that benefit a church or diocese are not typical private foundations.

• To prevent banks or trust companies from paying excise takes, taking fees and making this change, we must be proactive.

• Banks and Trust Companies are promising a 5% return on these reclassified trusts, but in the long run, this reclassification is not a benefit to the church or organization.

• Banks and Trust Companies may be able to distribute additional funds at the request of the beneficiary.

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To Begin Establishing Five Years Of Responsiveness,

Gather Information

• Collect copies of investment statements they have received from banks or trusts. Do this for all parish investments.

• If there is a trust, locate a copy of trust document and/or will that formed it. This will give information on how it is to be managed and for what purpose

• Request a copy of any tax filings made on their behalf by the bank or trust company

• Collect information on each investment, including any minutes of meetings held with trusts or banks over the last several years.

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Meetings with Trustees of the Trust

• The Church and/or the Diocese should schedule meetings with the Trustees of the Trusts owned by churches and/or the diocese. It is likely that there are a handful of such Trustees because so many banks and Trust companies have merged. Bank of America, JP Morgan Chase, HSBC, Citibank, M

and T Bank are just a few. You may be able to group meetings with multiple

churches and the Diocese Trustees will likely suggest telephonic or no meetings.

Compliance for them will be a very significant undertaking.

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Create Agendas and Establish Procedures

for All Meetings With Trustees

• The Agenda for the Meetings with the Trustees should include, but not be limited to, the following:

1. Performance of the Trust2. Current Status of the Trust (Trust or Foundation)3. Discussion about the expected investment policy of the

Trust4. Discussion on the purpose of the Trust5. Description on the needs of the organization for funds

and timing of payouts6. Next steps to meet the five-year significant voice test7. Keep minutes of all meetings to show compliance over

time

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CREATE SIMILAR AGENDAS FOR MANAGERS OF INVESTMENTS

(EVEN IF NOT A TRUST)

• Best Practices would mean that the gathering of information, regular reviews of results, discussion of expected asset allocation, pay-out expectations, draw schedules, etc. should be done for each and every Investment managed on behalf of a church or diocese or other organization. Periodically investment policies should be reviewed and updated.

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Chancellors Monitor IRS

• Request that the Chancellor Monitor IRS rules affecting Trusts and Church Investments

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Monitor Trustee Performance and Take Action if Required

• Trustees must cooperate with Beneficiaries in reporting, documenting and providing resources to the churches and dioceses as expected by the original donor.

• If cooperation does not happen, discuss removing the Trustee with Counsel. This may require Attorney General Action.

• If the Trust is less than $100,000-$150,000 explore with counsel the possibility of collapsing it.

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Monitor and Evaluate Investment Management Performance

for all Managers• All Managers, whether institutional or

Committee, should have results against others in the “space” evaluated annually.

• Consider management changes if managers underperform on some agreed upon length of time

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Best Practices, Summarized

• Letter to All Congregations Regarding Trusts (information in your packets)

• Form Committee of Affected Congregations, CFO and Trustees

• Gather All Documents Regarding Congregational Trusts and Investments, whether congregational or diocesan

• Develop Procedures for Diocese and Congregations to manage investments, whether trusts or other investments

• Meet Regularly to Assist Congregations With Oversight• Monitor Further IRS Advice Regarding All Investments• Evaluate Possibility of collapsing Trust• Evaluate Trustee for Appropriate Oversight and Cooperation• After the five-year compliance for significant voice test, file to

be a Trust.