Report Title:

[Click here and type Report Title (1 line limit)]

 

Description:

[Click here and type Description (5 line limit)]

 

THE SENATE

S.B. NO.

1006

TWENTY-FIRST LEGISLATURE, 2001

 

STATE OF HAWAII

 


 

A BILL FOR AN ACT

 

RELATING TO THE UNIFORM SUPERVISION OF TRUSTEES FOR CHARITABLE PURPOSES ACT (MODIFIED).

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. In accordance with Section 9 of the Article VII of the Constitution of the State of Hawaii and sections 37-91 and 37-93, Hawaii Revised Statutes, the legislature had determined that the appropriations contained in this Act will cause the state general fund expenditure ceiling for fiscal year 2001-2002 and 2002-2003 to be exceeded by $114,000 in fiscal year 2001-2002 and 2002-2003, or .00330 and .00304 percent in fiscal year 2001-2002 and 2002-2003 respectively. The reasons for exceeding the general fund expenditure ceiling are that the appropriation made in this Act is necessary to serve the public interest and to meet the need provided for by the Act.

SECTION 2. The State confers tax exempt status to charitable trusts and nonprofit organizations, including private foundations, because they provide needed public services which reduce the overall burdens of government. The people of this State, therefore, have a vested interest in the proper administration, operation, and disposition of all property held for charitable purposes in this State, and shall be represented by the attorney general in all courts of this State in respect of such property held by charitable trusts and nonprofit organizations including private foundations.

The purposes of this Act are: (1) to expressly extend the attorney general's powers and duties over charitable trusts as parens patriae to all nonprofit organizations, including private foundations, and fiduciaries holding property for charitable purposes; (2) to ensure that trustees and others holding property for charitable purposes properly administer, register and report on the existence of property held for charitable purposes to the attorney general, (3) to provide specific enforcement mechanisms and rule-making authority for the attorney general to carry-out common law supervisory powers and duties over charitable trusts and organizations; and (4) to provide public access to the administration and activities of charitable trusts and charitable organizations in order to protect the public's interest.

SECTION 3. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:

"CHAPTER ___

UNIFORM SUPERVISION OF TRUSTEES FOR CHARITABLE PURPOSES ACT (MODIFIED)

-1 Short title. This chapter shall be known and may be cited as the Uniform Supervision of Trustees for Charitable Purposes Act (Modified).

-2 Application of this chapter. This chapter applies to any trustee, as defined in section -3.

-3 Definitions. "Trustee" means any person, individual, group of individuals, corporation, nonprofit corporation, limited liability company, limited liability partnership, unincorporated association, trust, or other legal entity holding property for any charitable purpose; or any chief operating officer, director, executive director, manager, responsible officer or partner, or owner of a corporation or other organization holding property for a charitable purpose.

"Charitable purpose" means any purpose to promote the well-being of the public at large, or for the benefit of an indefinite number of persons, including but not limited to educational, literary, or scientific purposes, or for the prevention of cruelty to children or animals, or for the benefit of religion, rehabilitation services, public recreation or civic improvement.

"Religious organization" means any church or group organized for religious purposes, including but not limited to divine worship or religious teaching.

-4 Excluded entities. This chapter does not apply to the United States, any state, territory, or possession of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or to any of their agencies or governmental subdivisions.

-5 Entities exempted from registration and filing requirements of this chapter. Unless requested by the attorney general, the registration, filing, and reporting provisions under sections -6, -7, and -8 do not apply to:

(1) Any religious organization that holds property for religious, charitable, hospital, or educational purposes, or for the purpose of operating cemeteries or a home for the aged, or to any officer, director, or trustee thereof who holds property in an official capacity for like purposes;

(2) Any trustee holding property of a value less than $25,000 for a charitable purpose; or

(3) Any other charitable trust or charitable organization exempted from registration by rule by the attorney general.

-6 Registration. (a) Every trustee subject to this chapter who has received property for charitable purposes shall file a registration statement with the attorney general, within six months after any part of the income or principal is authorized or required to be applied to a charitable purpose, and prior to any disbursements. In the case of a trustee of a charitable organization that is in existence prior to the enactment of this chapter, the trustee shall file a registration statement with the attorney general within six months after the effective date of this chapter.

(b) The registration statement shall include the following information: (1) name, business address, and business telephone number of the charitable organization; (2) federal employer identification number; (3) type of legal entity; (4) name, address, and telephone number of all trustees, officers, directors, chief executive, and executive director; (5) the name of an individual agent authorized to receive service of process and his or her residence address; (6) address of all offices located within the State; (7) accounting period; (8) statement of purposes of the organization; (9) information regarding whether any trustee, officer, director, or employee of the organization has ever been convicted of any crime involving fraud, misuse or misapplication of funds, or has ever been the subject of any court order or judgment finding such person to have breached such person's fiduciary duties; (10) federal tax exempt status and any prior Internal Revenue Service modification or cancellation of its tax exemption; (11) a statement of income and expenses, and a balance sheet; and (12) any other information as may be required by the attorney general.

(c) The registration statement shall be signed and verified under penalty of perjury by two officers of a charitable corporation or organization or by two trustees of a charitable trust, provided that one signature will be accepted if there is only one officer or trustee. A registration fee of $15 shall be paid with each initial registration. If a trustee fails to maintain a registration of a trust or organization as required by this chapter, and its registration is canceled as provided in this chapter, and if that trust or organization remains in existence and by law is required to be registered, in order to re-register, a new registration must be filed accompanied by required financial reports and payment of the registration fee.

(d) If a person or trustee fails to register or maintain registration of a trust or organization as provided in this section, the person or trustee is subject to injunction, to removal, to account, and to appropriate other legal or equitable relief before a circuit or probate court. In the event of such action and in addition to other relief, the court shall impose a civil penalty of not less than $500 and not more than $1,000 against each person or trustee who fails to register or maintain registration required under this Act. The collected penalty shall be used by the attorney general for charitable trust and charitable organization enforcement and for providing charitable trust information to the public, and deposited into the fund established under section -23.

-7 Filing of governing instruments. (a) Every trustee subject to this chapter who has received property for charitable purposes shall file and register with the attorney general, within six months after any part of the income or principal is authorized or required to be applied to a charitable purpose, and prior to any disbursement, a copy of the trust, articles of incorporation, or other written instrument providing for the trustee's title, powers, or duties and that provides the charitable purposes of the charitable trust or charitable organization. In the event a trustee subject to this chapter is holding property for charitable purposes under no such written instrument, such trustee nevertheless shall file, in lieu of such instrument, a statement in writing setting forth his title, powers and duties, including a statement of the charitable purpose. If any part of the income or principal is authorized or required to be applied to a charitable purpose, whether a remainder interest or charitable lead interest, at the time this chapter takes effect, the filing shall be made within six months after the effective date of this chapter.

(b) If the settlor is still living, any trust which is registered because it is a charitable lead or remainder trust and the charitable interest has not matured, whether revocable or irrevocable, may be registered as a confidential registration. A confidential registration means that the attorney general shall hold the file confidentially and not make any filing therein public, unless required by an order of a court of competent jurisdiction. The attorney general may disclose a confidential registration for statistical purposes if all indications of names and identities are redacted.

-8 Periodic annual reports; rules and regulations, fees. (a) Except as otherwise provided, every trustee shall file with the attorney general at the time the organization's Internal Revenue Service tax return is due, including any Internal Revenue Service extensions, certain annual written reports under oath, setting forth:

(1) A copy of the current Internal Revenue Service tax return of the charitable organization including, but not limited to, Forms 990, 990-EZ, 990-PF, and 990-T;

(2) Copies of the organization's federal tax or information returns of all majority-owned subsidiaries or other organizations; and

(3) Such other information necessary or appropriate for the enforcement and supervision of, or public access to, the charitable organization as provided by rules.

(b) The attorney general may make rules and regulations as to the time for filing reports, the contents thereof, and the manner of executing and filing them. The attorney general may classify trusts and other organizations concerning property held for a charitable purpose as to purpose, nature of assets, duration of the trust or organization, amount of assets, amounts to be devoted to charitable purposes, nature of trustee, or otherwise, and may establish different rules for the different classes as to time and nature of the reports required so that:

(1) The attorney general shall receive current and complete annual reports as to all charitable trusts or other relationships of a similar nature, which will enable the attorney general to ascertain whether they are being properly administered; and

(2) Periodic reports shall not unreasonably add to the expense of the administration of charitable trusts and organizations.

The attorney general may suspend the filing of reports as to a particular charitable trust or organization for a reasonable, specifically designated time upon written application of the trustee filed with the attorney general, and after the attorney general has filed in the register of charitable trusts a written statement that the interests of the beneficiaries will not be prejudiced thereby, that periodic reports are not required for proper supervision by his or her office, and the period when such reports shall resume.

(c) The attorney general may cancel the registration of any trust or organization that willfully fails to comply with subsection (a) within the time prescribed, and the assets of the organization may through court proceedings be collected, debts paid and proceeds distributed under court supervision to other charitable purposes upon an action filed by the attorney general as law and equity allow. Upon timely written request, the due date for filing an organization's annual registration may be extended by the attorney general for a period of sixty days or the due date of the organization's federal tax or information return, whichever is later. Notice of cancellation of the registration shall be mailed by regular mail to the registrant at the registration filing address or to its registered agent or president twenty-one days before the effective date of cancellation. Each trust or organization that submit a written report to the attorney general after such trust's or organization's registration has been canceled shall re-register with the attorney general.

(d) Every trustee filing a report required by this section shall pay to the fund established in section -23, a fee based in part on the trust's or organization's gross income and receipts during the time covered by the report and in part on its fund balance at the close of the calendar or fiscal year adopted by the charitable trust or organization:

(1) The fee based on income and receipts shall be as follows:

(A) $10, if income and receipts during the time covered by the report are less than $25,000;

(B) $25, if $25,000 or more but less than $50,000;

(C) $50, if $50,000 or more but less than $100,000;

(D) $75, if $100,000 or more but less than $250,000;

(E) $135, if $250,000 or more but less than $500,000;

(F) $170, if $500,000 or more but less than $1,000,000; or

(G) $200, if $1,000,000 or more.

(2) The fee based on the fund balance shall be one-hundredth of one per cent of the fund balance, rounded off to the nearest whole dollar. Any fund balance over $10,000,000 shall not be subject to the fund balance fee. No fee shall be due under this subsection if the fund balance is less than $50,000. With respect to trusts or organizations domiciled outside the State of Hawaii, only the fund balance held in Hawaii shall be subject to the fee due under this subsection. For the purpose of calculating the fee due under this subsection, the fund balance shall not include that portion of the value of fixed assets utilized by any charitable trust or organization in fulfilling its charitable purpose.

(e) In the case of each failure to file a report required under this subsection (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause, there shall be paid by the person failing to so file, $20 for each day during which such failure continued, but the total amount imposed under this subsection on any person for failure to file any report shall not exceed $20,000. Reports submitted without the proper fee shall not be accepted for filing.

-9 Additional rules. The attorney general may adopt rules necessary for the administration of this chapter.

-10 Investigation. In addition to the powers conferred under chapter 28, the attorney general may investigate transactions and relationships of any trustee subject to this chapter for the purpose of determining whether the property held for charitable purposes is properly administered, whether any trustee has violated any provision of this chapter, or whether any trustee has breached a fiduciary duty. The attorney general may require any agent, trustee, fiduciary, beneficiary, institution, association, corporation, or other person to appear, at a named time and place designated by the attorney general, in the county where the person resides or is found, to give testimony under oath and to produce books, memoranda, papers, documents of title and evidence of assets, liabilities, receipts, disbursements, or other information in the possession or control of the person ordered to appear. Every trustee has the duty to provide to the Attorney General all attorney-client privileged communications regarding the administration of the charitable trust or organization, excepting only attorney-client privileged communications paid for by the trustee from the trustee's own funds for the trustee's own defense.

-11 Attendance of parties and witnesses; Order to attend; hearings; witness fees. In addition to the powers conferred under chapter 28, when the attorney general requires the attendance of any person, as provided in this chapter, the attorney general shall issue an order setting forth the time when and the place where attendance is required and shall cause the same to be served upon the person in the manner provided for service of process in civil cases. Such order shall have the same force and effect as a subpoena and, upon application of the attorney general, obedience to the order may be enforced by the circuit or probate court in the county where the person served with the subpeona resides or is found, in the same manner as though the notice were a subpoena. The court may, in case of refusal to obey the order issued by the attorney general, issue an order requiring such person to appear before the attorney general to give testimony and to produce documentary evidence, if so ordered, or to give evidence relating to the matter in question, and any failure to obey such order of the court may be punishable as a contempt of court.

-12 Public inspection of register and reports. Subject to rules and regulations adopted by the attorney general, the register listing the names of all charitable trusts and nonprofit organizations, including private foundations, and any other information designated in rules adopted by the attorney general, shall be open to public inspection and copying as provided in chapter 92F.

-13 Powers of the attorney general; jurisdiction of court. In addition to the powers conferred under chapter 28, the attorney general may institute appropriate proceedings to secure compliance with this Act and to invoke the jurisdiction of the court. The powers and duties of the attorney general provided in this chapter are in addition to existing powers and duties. Nothing in this chapter shall impair or restrict the jurisdiction of any court with respect to any of the matters covered by it, except that no court shall have the jurisdiction to modify or terminate any trust of property for charitable purposes unless the attorney general is a party to the proceedings. Every charitable organization with more than $50,000 in annual income or more than $500,000 in assets shall be subject to the supervisory power of the probate court and required to account to the probate court in the manner provided by section 554-4. Failure without good cause to comply with any order of any court shall constitute grounds for removal of the officers and directors of a charitable organization or trustees of a charitable trust and the appointment by the court of successor officers and directors or trustees.

-14 Custodians to furnish copies of instruments. Every person who offers for probate any instrument which establishes a testamentary trust of property for charitable purposes or who records in any county or city and county any inter vivos transfer of property for charitable purposes shall furnish a copy of such document to the attorney general. The custodian of the records of any court having jurisdiction of charitable trusts shall furnish such copies of papers, records and files of his office relating to the subject of this chapter as the attorney General requires.

-15 Duties of tax authorities. On or before April 20th of each year, every officer, agency, board, or commission of this State shall file with the attorney general a list that includes the name and business address of every trust or charitable organizations subject to this chapter that has submitted an application for exemption from taxation. The list shall include any application for exemption filed with the agency as of December 31 of the preceding year. Notwithstanding any statutory confidentiality provisions to the contrary, every taxing authority of the State, or its agencies or political subdivisions, shall make available to the attorney general for inspection and copying all tax returns and return information of all charitable organizations upon request.

-16 Recovery of expenses by the State. In any proceeding in any court concerning a charitable trust or other nonprofit organization, including private foundations, brought by the attorney general seeking enforcement or compliance with the provisions of this chapter, the court having jurisdiction of such proceedings may require the payment all reasonable expenses incurred by the attorney general from the corpus or income, or both, of the trust or organization, in such reasonable amounts as the court may order. Necessary expenses include but are not limited to the costs of special deputies attorney general, accountants, auditors, consultants, and experts employed or retained to assist with the investigation, preparation, and presentation in court of the charitable trust or nonprofit organization enforcement action. The court may also award to the attorney general reasonable attorneys fees, at hourly rates prevailing in the community for similar services, to compensate for the time expended by deputies in connection with of any enforcement action brought hereunder.

-17 Injunctive relief. In any action in which the attorney general alleges that a charitable trust or nonprofit organization needs to be protected or the trustees of a charitable trust or organization have breached their fiduciary duties, and injunctive relief and removal of trustees is sought, the circuit or probate courts shall exercise their discretion as the equities require and may, as a part of injunctive relief, and after a hearing where the trustees shall have an opportunity to be heard, appoint temporarily or permanently a receiver or a temporary trustee or trustees to protect and operate the trust or organization and may temporarily, or as ultimate relief for breach of duty or to protect the trust or organization, permanently remove any trustee, officer, director, or member from office and appoint replacements to protect the public interest. The public interest is paramount and the stewardship of a charitable organization is a privilege to serve as a fiduciary for the public good.

-18 Breach of fiduciary duty; liability. (a) If any trustee of a charitable trust or organization commits a breach of fiduciary duty, the trustee, individually, is chargeable with any of the following that is appropriate under the circumstances:

(1) Any loss or depreciation in value of the trust or organization's property resulting from the breach of fiduciary duty, with interest;

(2) Any profit made by the trustee through the breach of fiduciary duty, with interest;

(3) Any profit that would have accrued to the trust or organization if the loss of profit is the result of the breach of fiduciary, with interest; and

(4) Any costs, expenses or fees incurred by the attorney general in establishing the breach of trust or fiduciary duty.

(b) If the trustee is liable for interest under this section, the liability shall be the greater of the following amounts:

(1) The amount of interest that accrues at the legal rate on judgments in effect during the period when the interest accrued; or

(2) The amount of interest actually received.

-19 Prohibition against personal benefit or use of funds. Any trustee who without lawful authority, in violation of the trust or organization purposes or by intentional breach of fiduciary duty, intentionally disburses or causes charitable funds or property to be used for the trustee's personal benefit or use in an aggregate amount that exceeds $1,000 within a five year period is guilty of a class C felony and is subject to the sentencing provisions of section 706-660 and is subject to a civil penalty of up to $50,000 for each violation.

-20 Punitive damages. In addition to any other remedies available at law or equity, any person who, intentionally and with malice breaches any fiduciary duty is subject to punitive damages in an appropriate amount upon a trial on the issue.

-21 Court approval required; deviation or modification; transfer of assets; termination. A trustee must obtain the approval of the probate court in order to:

(1) Deviate from or modify the governing instrument of a charitable trust;

(2) Deviate from or modify the governing instrument of a nonprofit organization, including any private foundations, if such organization had more than $50,000 of annual income during any of the preceding three years, or assets valued at more than $500,000;

(3) Transfer all or a substantial part of its assets to another organization as a part of any reorganization or merger of the charitable organization; or

(4) Terminate a charitable organization.

-22 Copies of registration materials or financial documents. All copies of registration materials or financial documents filed with the attorney general pursuant to the provisions of this chapter shall, when certified by the attorney general, be taken and received in all courts, public offices, and official bodies as business records of the filer.

-23 Hawaii charitable trust and organization special fund. There is created in the state treasury the Hawaii charitable trust and organization special fund. All fees and penalties collected by the attorney general pursuant to this chapter shall be deposited in the Hawaii charitable trust and organization special fund. Moneys in the fund shall be appropriated to the attorney general for the enforcement of this chapter, the dissemination of public information, and charitable trust and charitable organization oversight. All unencumbered and unexpended moneys in excess of $114,000 remaining on balance in the Hawaii charitable trust and organization special fund at the close of June 30 of each year shall lapse to the credit of the Hawaii charitable trust and organization special fund.

-24 Contrary and inconsistent provisions invalid. This chapter shall supersede the provisions of any charitable instrument that is contrary or inconsistent with the provisions of this chapter."

SECTION 4. This Act shall not be construed to diminish, defeat, or impair any common law power that the attorney general may possess as parens patriae of charitable trusts, or any right established by an order of a court of competent jurisdiction.

SECTION 5. Section 36-38, Hawaii Revised Statutes, is amended to read as follows:

"36-27 Transfers from special funds for central service expenses. Except as provided in this section, and notwithstanding any other law to the contrary, from time to time the director of finance, for the purpose of defraying the prorated estimate of central services expenses of government in relation to all special funds, except the:

(1) Special summer school and intersession fund under section 302A-1310;

(2) School cafeteria special funds of the department of education;

(3) Special funds of the University of Hawaii;

(4) State educational facilities improvement special fund;

(5) Convention center capital and operations special fund under section 206X-10.5;

(6) Special funds established by section 206E-6;

(7) Housing loan program revenue bond special fund;

(8) Housing project bond special fund;

(9) Aloha Tower fund created by section 206J-17;

(10) Domestic violence prevention special fund under section 321-1.3;

(11) Spouse and child abuse special account under section 346-7.5;

(12) Spouse and child abuse special account under section 601-3.6;

(13) Funds of the employees' retirement system created by section 88-109;

(14) Unemployment compensation fund established under section 383-121;

(15) Hawaii hurricane relief fund established under chapter 431P

(16) Hawaii health systems corporation special funds;

(17) Boiler and elevator safety revolving fund established under section 397-5.5;

(18) Tourism special fund established under section 201B-11;

(19) Department of commerce and consumer affairs' special funds;

(20) Compliance resolution fund established under section 26-9;

(21) Universal service fund established under chapter 269;

(22) Integrated tax information management systems special fund under section 231-3.2;

(23) Insurance regulation fund under section 431:2-215;

(24) Hawaii tobacco settlement special fund under section 328L-2;

(25) Emergency budget and reserve fund under section 328L-3;

(26) Probation services special fund under section 706-649; [and]

(27) High technology special fund under section 206M-15.5; and;

(28) Hawaii charitable trust and organization special fund established by section 23;

shall deduct five percent of all receipts of all other special funds, which deduction shall be transferred to the general fund of the State and become governmental realizations of the State. All officers of State and other persons having power to allocate or disburse any special funds shall cooperate with the director in effecting these transfers. To determine the proper revenue base upon which the central services assessment is to be calculated, the director shall adopt rules pursuant to chapter 91 for the purpose of suspending or limiting the application of the central service assessment of any fund. No later than twenty days prior to the convening of each regular session of the legislature, the director shall report all central service assessments made during the preceding fiscal year."

SECTION 6. There is appropriated out of the general revenues of the State of Hawaii the sum of $114,000, or so much thereof as may be necessary for fiscal years 2001-2002, and $114,000 thereof as may be necessary for fiscal year 2002-2003, to be paid into the Hawaii charitable trust and organization special fund created in section 23. The sum appropriated by this Act shall be expended by the department of the attorney general for the purposes of the fund.

SECTION 7. New statutory material is underscored.

SECTION 8. This Act shall take effect upon its approval, provided that:

(1) The amendments made to section 36-27, Hawaii Revised Statutes, by this Act shall not be repealed when this section is reenacted on July 31, 2003, pursuant to section 9 of Act 142, Session Laws of Hawaii 1998;

(2) The amendments section 36-27, Hawaii Revised Statutes, by this Act shall not be repealed by acts subsequent to those contained in the 1998 Session Laws of Hawaii, unless:

(A) Section 36-37 is repealed in its entirety and is not in the same act reenacted in its entirety; or

(B) The provisions added to section 36-27, Hawaii Revised Statutes, by this Act are included within brackets, signifying pursuant to standard drafting conventions that the provisions are intended to be repealed.

INTRODUCED BY:

_____________________________