Remember: Almost all corporate and trustee matters are governed by state law. An attorney familiar with your state's laws in these areas should be used. They should also review all sample forms to ensure they comply with controlling state law.

• Requirements of the Presbyterian Church ( U.S.A.) Constitution
• Forming a Local Church Corporation
• Fiduciary Duty of Trustees
  • Investment of Funds
  • Church Property
  • Annual Report and Record Keeping
  • Building Committees and Programs
  • Sample Articles of Incorporation —
  • Sample Corporate Bylaws —

The law imposes two basic duties on all trustees: the duty of loyalty and the the duty of care. The duty of loyalty requires that the trustee take no part in an action regarding trust property in which she would have an actual or potential conflict of interest without having previously disclosed that conflict to the board. Decisions must be made by the trustee looking only toward the interest of the beneficiaries and not to the trustee's own interest. Any form of self-dealing is prohibited and any profit or advantage gained by the trustee due to self-dealing transactions must be returned to the beneficiaries. When a conflict or potential conflict does arise, the trustee must disclose the conflict or potential conflict prior to any discussion of the decision to be made. Preferably, this disclosure should be in writing and given to the secretary and chair of the board. This procedure will provide protection to a trustee who might later be challenged on whether or not she actually did make the proper disclosure. Any trustee with an actual or potential conflict of interest should abstain from any discussion or action on the issue in question. Care should be taken to document the abstention in the minutes in order to provide a record of its in the event of a challenge on this point. Trustees who breach their fiduciary duty of loyalty may be required to reimburse the trust for any los suffered by the trust due to that breach.

Courts often deal harshly with those who deal for their own benefit in a trust situation. Justice Cardozo, in the case of Meinhard v. Salmon, 249 N.Y. 458, 464 (1928), made a famous statement concerning the high standards the trustees must uphold:

Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden by those bound by fiduciary ties. A trustee is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty ...

In local church settings, disclosure of the actual or apparent conflict should be followed by the individual's abstention from participation in the decision. These situations can arise, for example, in building situations (where members are contractors), in financial management areas (where members are bankers or investment advisors), or in insurance (where members are insurance agents). So long as the potential conflict is properly disclosed, and the party in conflict abstains from participation in the decision or selection process, the trustees can still elect to do business with the disclosing party. However, the board of trustees as a whole has a legal duty to ensure that its decisions are made in the best interests of the trust beneficiaries. This standard requires extra care when the trustees are considering doing business with an organization in which one of the trustees has a personal or professional interest.

The second primary duty of all trustees is fulfillment of the duty of care. Trustees are required to act in good faith and in a manner they believe to be in the best interests of the beneficiaries and of the trust. They should act with such care as an ordinarily prudent person would use under similar circumstances in the management of her own affairs. Thus, trustees are required to be diligent in attending meetings and in making sure they are properly informed as to that various aspects of the decisions to be made. Trustees who do not have time to attend meetings should resign from the board. Attendance at meetings and reading and understanding relevant materials concerning the issues at hand are vital. To the extent that any board of trustees is making decisions, it needs a reasonable basis for making those decisions.

Given the facts available at the time of the decision, trustees are required to use their best judgment in making their decision. Trustees are not held responsible for facts that they could not have known at the time the decision was made. Decisions made in good faith and with reasonable care should be upheld if challenged even if they prove not to be the best decision in the light of later unfavorable developments. However, boards of trustees must keep track of the information available to and considered by the board in making the decision in order to answer such charges. Regular and accurate minutes, including exhibits of information considered, should be kept by boards of trustees.

Trustees are not absolved from the requirements of the duty of care by delegating their responsibility to others. For example, should a board of trustees entrusted with a large sum of money engage an investment adviser? The board still has the ultimate responsibility for the funds, even if the adviser is given broad powers to make trust investments. The trustees need to be able to demonstrate that proper procedures were used in choosing advisers. Persons engaged to handle funds or to do legal work should be trustworthy and competent in the areas for which they are engaged. Trustees may rely on delegates so long as the initial decision in choosing the delegates is well-founded and so long as the trustees have no basis for concern about relying on the delegates. Any trustee who has knowledge, from whatever source, that would cause the reliance of the board of trustees on a particular person to be unwarranted must disclose that knowledge to the board. If the trustee does not make the disclosure and allows the board to rely on a delegate she knows to be unreliable, the trustee is not considered to be acting in good faith any may be personally liable for breaching her fiduciary duty of care.

The essential elements of most trusts are (1) designation of a beneficiary and a trustee, (2) sufficient identification of the funds or other assets to enable the passing of good title to the trustee, and (3) actual delivery of the property to the trustee with the specific intention of passing title of the property to the trustee. In the particular church, the trustees must be sure that the terms of the trust agreement as spelled out by the donor are carried out. For example, should the trust provide funds exclusively for loans to students, only loans to students may be made. The funds could not be diverted and used for scholarships because that would be a breach of the trust agreement. Any such action taken in violation of the trust agreement by the board will subject the individual trustees and the board as a whole to liability for a breach of fiduciary duty in not following the instructions of the trust. Trustees should be extremely careful to make sure that restrictions on the use of trust monies are carefully reviewed and followed where legally permissible. Courts and juries often deal harshly with boards of trustees when trust funds are perceived to have been misappropriated or misused in contravention of express restrictions and conditions placed upon such funds.

If bequests, legacies, and trusts are encumbered with restrictive covenants which may guarantee the obsolescence of the purpose of the gift or otherwise impossible to administer, the session may wish to instruct the trustees to reject it. The session, pursuant to G-7.0402, has authority to direct the board of trustees regarding acceptance or rejection of any gift or bequest for the use and benefit of the particular church. In turn, trustees should make the governing body aware of the necessity for responsibility in the construction and administration of all trust bequests.

Local trustees should carefully examine any actions taken in regard to an investment or distribution of funds held in trust. If a trustee becomes aware of situation where the funds are being improperly invested, distributed to the wrong parties, or where proper reports by investment advisers or the trustees are not being made, she should ask why proper actions are not being taken. Failure to take action in such a case could expose a trustee with such knowledge to a charge that the duty of care was breached. When necessary reporting procedures are not followed, it is difficult to argue later that the proper standard of care was upheld in the handling of the trust or church funds.

The trustees are responsible to carry out the donor's intent, if it is expressed, for the investment of principal and distribution of income. In most jurisdictions, trustees making decisions about trust investments must assume the posture of the prudent person investing her own funds for her own purposes. The prudence required involves sufficient diversification of investments to minimize risk in order to preserve capital as well as consideration of the income potential of any investment. Funds also must be invested in conformity with the laws of the state in which the church is located.

Whenever the board of trustees is dealing with gifts and trust property, it is acting subject to the direction of the session. The board of trustees may make recommendations and interim decision on management of property. However, all significant decisions and permanent actions should be approved by the session.

Routine receipts of gifts, sale of securities, and administration of the gifts is handled by the board of trustees. In the event there is some unusual question regarding a gift of securities, the session should be consulted. Receipt of unrestricted gifts of securities in the normal course of events presents no problem. However, when considering accepting securities or other property subject to restrictions as to use or sale of the property, it is wise to obtain approval of the session or to act in accordance with previously enacted session policies regarding restricted gifts. For example, if a donor wished to give $500 in a restricted fund, only the income from which was to be used for scholarships for needy church members to attend a specific Presbyterian Church (U.S.A.) related college, the administrative responsibility of the choice to award this income is likely greater than the benefit it provided. Therefore, the decision might be made to encourage the donor strongly to take the restriction off the gift (explaining why administering such a bequest would be unduly cumbersome) or suggest an alternate trustee. Likewise, if a donor gave property with a restriction on sale or use, such restrictions could present a problem. The church or the board should consider developing a policy (approved by the session) to be used in accepting or rejecting gifts, bequests, and the obligations of trust administration.

When receiving a specific gift, it is important that the trustees consider the appropriateness of retaining the security or selling it and investing the proceeds. Typically, if the church portfolio contains a large percentage of investment in a single stock or security, there are problems with lack of diversification. A prudent person standard would suggest selling of the security to have a more varied portfolio mix. Also, concerns for investment return and long-term growth could dictate a more diverse portfolio. When a decision has been made to sell or purchase securities, a board resolution should be adopted.

Particular concern should be given to the handling of original stock certificates and related original evidences of ownership. It is advisable to use a stockbroker to handle stock transactions. As long as the broker is reputable and properly bonded, it may be easiest to keep the church's securities in street name accounts at the broker's office, i.e., the original certificates are not held by the church trustees but rather by the stock brokerage house itself. Be aware that lost or misplaced certificates are expensive and cumbersome to replace. Certificates should be mailed by certified mail or return receipt requested or, if possible, personal delivery with a receipt from the brokerage house.

Because the session has the ultimate authority over bequests, gifts, and trusts, it should consider drafting a policy for the acceptance or rejection of such property. When receiving bequests and gifts that have a restricted purpose, it is important to memorialize the terms of the bequests, keep them properly organized in the church records, and keep proper financial accounting. The board of trustees, in consultation with the session, should consider adopting investment guidelines and standards.

There are often legal and tax issues involved in dealing with property and the administration of trusts. Consult with an attorney or tax advisor to obtain an expert opinion on legal or tax questions. There are significant tax advantages to the donor who contributes appreciated securities. Donors of security or other non-cash gifts worth more than $500 must file Internal Revenue Service Form 8283, Non-cash Charitable Contributions. This form acknowledges that a proper evaluation has been made of the property, which in the case of regularly traded securities would be straightforward. The church is required to sign Part Four of Form 8283. Under that form, the church must acknowledge receipt giving its name, Employer Identification Number, and a signature by the appropriate board representative, typically the chairperson, who is empowered to receive gifts.

Should the board decide that the church will sell the securities within two years of the date of receipt, it is necessary to file Internal Revenue Service Form 8282, Donee Information Return, with the Internal Revenue Service and send a copy to the donor. An exception applies to certain publicly traded securities and items having a value of $500 or less if the donor identified the items and signed the statement in Part 2 of Form 8283.

The board of trustees should prepare an annual written report to the session and include in that report the amount of income received from income-producing property, a detailed list of expenditures in relation thereto, a list of all trusts in which the local church is a beneficiary, how those funds are invested, and an explanation of the use and goals for which those funds are expended or applied.

See the Property chapter for a detailed discussion of the trust clause, property transfers, and other aspects of church real property. In regard to church property, the board of trustees has certain responsibilities to the whole church as established in the Constitution. The trust clause set out at G-8.0201 has been upheld by both state and federal courts as valid expressions of the rights of the denomination, through its presbyteries, to retain church property where local congregations are in schism, have disbanded, or have been discontinued and the property has been abandoned. Great care must be taken to ensure that these clauses are protected in the event of legal attack. Written authorization of the presbytery is necessary for the trust clause to be released in conveyances of mortgages by the local church board of trustees. A limited exception is set out at G-8.0701. See the Property chapter for a full discussion. All involved must be especially aware of the risks and responsibilities inherent in the handling of real estate transactions. Competent counsel in the area of real estate law should be engaged and great care taken in any real property transaction. If such transactions are not carefully handled, questions regarding title validity and restrictions on the use of the property that could have been resolved at the outset may lie dormant for years. These questions can become major problems when future efforts are made to convey the property or to use it for other purposes. It should be noted that prior to a recommendation to discontinue the use of church property as a particular church (or before any action is taken to consider local church property abandoned), the presbytery should obtain and consider an opinion of legal counsel. This legal work will be much simpler if the groundwork has been properly laid years earlier as a part of the original real estate transaction.

Where real property is being conveyed to a local church, every effort should be made to take the property free of any encumbrances such as possibilities of reverter to the donor's heirs if the property is no longer used for church purposes. These steps should be taken because local churches may find it necessary in the future to relocate or to use the property for other purposes. Reverter or other restrictive use clauses could lead to the property reverting to the heirs of the donor with no compensation to the local church. Current deeds should be reviewed for potential restrictive clauses. An attorney familiar with real estate should be consulted about the best course of action if such clauses are included in the property deeds. Be sure the attorney is also aware of the relevant trust provisions in the Constitution. It is strongly advised to use the following clause or similar language in deeds:

The premises herein conveyed shall be used, kept, and maintained by the grantee for Divine Worship and other purposes of its ministry as a particular church belonging to the Presbytery of  _______________________________ (or its legal successors), subject to the provisions of the Constitution of the Presbyterian Church (U.S.A.). The grantee holds the property in trust pursuant to the provisions of the Constitution of the Presbyterian Church (U.S.A.).

Although the local church board of trustees does not have program responsibilities in the local church structure, it is responsible for maintaining and repairing the local church property so that the programs of the particular church can be carried out. The church trustees should inspect the property annually to determine upcoming maintenance needs. Record keeping of prior maintenance expenditures can be useful in planning when future expenditures can be expected, such as when a new roof might be needed, when the furnace might need to be replaced, and so on. By systematizing the repair and maintenance function through careful record keeping and annual inspections, the trustees will be able to submit budgets adequate to provide for the financing of needed repairs and maintenance. In addition, ideas for property use policies are often generated within the board of trustees. Such policies should keep program considerations in mind and be developed in conjunction with the minister and the session. In preparing policies on the use of the church buildings and property by church groups and community groups, flexibility should be a primary consideration. Factors to be considered include the purpose and nature of the groups, the possibility of additional maintenance expenses, the cleaning and locking of the property after the use is completed, the supervision of the groups using the church, and so on. It is important to remember, however, that final decisions regarding the programmatic nature of church property use are not vested in the board of trustees but in the session. See the Property chapter for a detailed discussion of leasing the church's property.

1. The legal description and the reasonable valuation of each parcel of real estate owned by the church.
2. The specific name of the titleholder in each deed of conveyance of real estate to the local church.
3. An inventory and the reasonable valuation of all personal property owned by the local church.
4. The amount of income received from any income-producing property and a detailed list of expenditures in connection therewith.
5. The amount received during the year for building, rebuilding, remodeling, and improving real estate, and an itemized statement of expenditures.
6. Outstanding capital debts and how contracted.
7. A detailed statement of the insurance carried on each parcel of real estate, indicating whether restricted by co-insurance or other limiting conditions and whether adequate insurance is carried.
8. The name of the custodian of all legal papers of the local church, and where they are kept.
9. A detailed list of all trusts in which the local church is the beneficiary, specifying where and how the funds are invested, and in what manner the income is expended or applied.

An annual report with these elements will keep the trustees and session well informed about the church's assets and liabilities. Each church board of trustees should have a system of record maintenance to establish the chain of ownership of all church-owned properties. A title company can perform a title search on all church real estate. This report will inform the trustees what the property status is — whether the title is clear of if flaws or restrictions exist. In the event that conveyances, mortgages, or other actions concerning the local church property are contemplated, these records will be vital in preventing delays in the transactions. When real estate transactions are undertaken, this information will be required by potential buyers and/or financial institutions. An up-to-date inventory of local church and manse contents is also advisable. Retain records of purchases; consider supplementing the list with a videotape of contents, and keep inventory materials off-site in a fireproof place such as a bank safe-deposit box where other vital church papers are kept.

sample Articles of Incorporation —
sample Corporate Bylaws—