There are many reasons why a charitable trust or charitable organization might dissolve, terminate, wind up or close. For example, the trustee(s) of a charitable trust or the directors of a charitable nonprofit organization may determine that it is no longer cost effective to operate, or the trust or organizing documents may require termination of the trust or organization under certain circumstances that have occurred. A charitable organization can also be dissolved involuntarily if it has failed to meet certain legal requirements.

Closing of a Charitable Nonprofit Corporation

A charitable nonprofit corporation could cease because of a decision by its leadership, or it could be forced to close.

Voluntary Dissolution

Chapters 11 and 22, Texas Business Organizations Code, provide the roadmap for the voluntary dissolution (winding up) of a charitable nonprofit corporation. Generally, a charitable nonprofit corporation seeking to dissolve or terminate must vote to do so, pay all debts, distribute any remaining assets to a charity with the same or similar charitable purpose according to a plan of distribution, and file a certificate of termination with the Texas Secretary of State. Prior to closing, a charitable nonprofit corporation that is dissolving may also need to ensure that it is compliant with state, federal and local tax laws and other rules governing its operations. A charitable nonprofit corporation’s governing documents, including its Certificate of Formation and bylaws may also contain requirements relevant to voluntary dissolution.

Unless a donor specified otherwise at the time of the gift, a dissolving charitable nonprofit corporation that holds funds or property restricted by a donor for a particular purpose or time period must distribute those funds or property to another charity that can hold the asset in conformity with the donor’s stated restrictions. A dissolving charity may need to seek a judicial modification of a donor-restricted gift in order to properly distribute it. (See Modification of Charitable Gifts and Funds)

Selected relevant statutes:

  • §§ 22.053-22.054, Tex. Bus. Orgs. Code – Distribution of Dividends and Income
  • §§ 22.301-22.303, § 22.164, Tex. Bus. Orgs. Code – Decision to Wind Up
  • §§ 22.304-22.305, Tex. Bus. Orgs. Code - Application and Distribution of Property
  • § 22.307 Tex. Bus. Orgs. Code – Responsibility for Winding Up
  • § 11.051-11.055, Tex. Bus. Orgs. Code – Winding Up
  • § 11.101, Tex. Bus Orgs. Code - Filing of Certificate of Termination
  • § 11.105, Tex. Bus. Orgs. Code – Requirements for Certificate of Termination of a Nonprofit
  • § 11.102, Tex. Bus Orgs. Code – Effectiveness of Termination

Involuntary Termination

A charitable nonprofit corporation may be terminated involuntarily for several reasons, including failure to file a periodic report, failure to maintain a registered agent, and failure to properly meet tax obligations. A charitable nonprofit corporation could also forfeit its right to do business in Texas for failure to permit the Attorney General to examine its records.

Selected relevant statutes:

  • § 11.251, Tex. Bus. Orgs. Code – Termination by the Secretary of State of a Texas Entity
  • §§ 11.351-11.359, Tex. Bus. Orgs. Code – Claims by or Against a Terminated Entity
  • §§ 22.360-22.362, Tex. Bus. Orgs. Code – Forfeiture of Nonprofit Corporation’s Right to Conduct Business for Failure to File Periodic Report
  • § 12.155, Tex. Bus. Orgs. Code – Forfeiture of Right to Do Business for Failure to Comply with Attorney General’s Request for Records
  • §§ 171.251-171.252, Tex. Tax Code – Forfeiture of Corporate Privileges by Comptroller for Failure to Comply with Franchise Tax Provisions
  • §§ 171.301-303, §§ 171.309-171.311, Tex. Tax Code – Forfeiture of Charter or Certificate of Authority by Attorney General or Secretary of State After Tax Forfeiture

Closing of a Charitable Unincorporated Nonprofit Association

An unincorporated charitable nonprofit association that is closing or has been inactive for three years or longer must distribute any remaining assets to a nonprofit association or nonprofit corporation with the same or similar purpose.

Selected relevant statute:

  • § 252.009, Tex. Bus. Orgs. Code – Disposition of Personal Property of Inactive Nonprofit Association

Termination of a Charitable Trust

A charitable trust will terminate by its terms if the trust document provides for termination at a specific time or under specific circumstances. A charitable trust may also terminate pursuant to a court action. The trust document may also authorize the trustee(s) to terminate at the trustees’ discretion. In addition, a trustee may terminate a trust having a total value less than $50,000 if the value of the property is insufficient to justify the continued cost of administration.

Upon termination of a charitable trust, the assets of the trust will be distributed according to the terms of the trust or the order of a court.

Selected relevant statutes:

  • § 112.054, Tex. Prop. Code – Judicial Termination and Modification of Trusts
  • § 112.052, Tex. Prop. Code – Trustee Administration According to Trust Terms
  • § 112.053, Tex. Prop. Code – Settlor Provisions for Distribution of Trust on Termination
  • § 112.059, Tex. Prop. Code – Termination of Uneconomic Trust

Fiduciary Duties of the Officers and Directors of Charitable Nonprofit Corporations

A fiduciary is someone who holds a position of trust and from whom good faith and candor is expected. Members of the board of directors and officers of a nonprofit corporation are fiduciaries, charged to act in good faith, with ordinary care, and in the manner reasonably believed to be the best interest of a charitable nonprofit corporation. They must manage charitable assets for the use and benefit of the public through the charity’s mission. Fiduciary duties include the: (i) duty of care; (ii) duty of loyalty; and (iii) duty of obedience.

Some sources of guidance and authority for directors’ and officers’ fiduciary duties, in addition to the common law, are: (1) the Texas Business Organizations Code, (2) the Texas Uniform Management of Institutional Funds Act, (3) the charitable nonprofit corporation’s Articles of Incorporation or Certificate of Formation, and (4) the charitable nonprofit corporation’s bylaws.

Duty of Care. Directors and officers have a duty to exercise ordinary care in the management of the organization, often by staying informed, being engaged in their role as a director, and acting in good faith.

Duty of Loyalty. Directors and officers are tasked with a duty of loyalty to act for the benefit of the charitable nonprofit corporation and not for their own personal benefit. When a director or officer has a personal stake in the outcome of a charitable nonprofit corporation’s transaction, that interested transaction generally constitutes a conflict of interest that, at minimum, requires disclosure.

Duty of Obedience. Directors and officers have a duty of obedience to the charitable nonprofit corporation to pursue the goals of the nonprofit through its mission, in compliance with the governing documents.

Selected relevant statutes:

  • § 22.102, Tex. Bus. Orgs. Code – Bylaws
  • § 22.204, Tex. Bus. Orgs. Code – Board Members
  • § 22.221, Tex. Bus. Orgs. Code – General Standards for Directors
  • § 22.225, Tex. Bus. Orgs. Code – Loan to Director Prohibited
  • § 22.235, Tex. Bus. Orgs. Code – Officer Liability
  • § 22.352, Tex. Bus. Orgs. Code – Financial Records and Annual Report
  • Chapter 163, Tex. Prop. Code – Texas Uniform Prudent Management of Institutional Funds Act

Fiduciary Duties of Trustees

A fiduciary is someone who holds a position of trust and from whom good faith and candor is expected. A trustee is a fiduciary who is held to a high and strict standard of conduct to act in the best interest of both current and future trust beneficiaries. The main sources of guidance and authority for a trustee’s fiduciary duties, in addition to the common law, are the trust agreement itself and the Texas Property (Trust) Code.

Selected relevant statutes:

  • § 113.006, Tex. Prop. Code – General Authority to Manage and Invest Trust Property
  • § 113.051, Tex. Prop. Code – General Duty
  • § 114.001, Tex. Prop. Code – Liability of Trustee
  • § 114.007, Tex. Prop. Code – Exculpation of Trustee
  • §§ 117.006-8, Tex. Prop. Code – Duties at inception of trusteeship, Loyalty, Impartiality

Management of Donated Charitable Funds

Management of donated funds is a key responsibility of the leadership of charitable organizations. Donations can be either restricted or unrestricted. Restricted funds are donor gifts made for a designated purpose or for a specified time period. In contrast, unrestricted funds do not have donor-specified purposes or time periods and can be used for any legal purpose appropriate for that charity.  Some aspects of the management of donor funds are set out in the Texas Uniform Prudent Management of Institution Funds Act (TUPMIFA) and the Texas Trust Code.

Selected relevant statutes:

  • Chapter 111-117, Tex. Prop. Code – Texas Trust Code
  • Chapter 163, Tex. Prop. Code – Texas Uniform Prudent Management of Institutional Funds Act

Modification of Charitable Gifts and Funds

Restrictions on donor funds are often irrevocable and cannot be changed. In appropriate circumstances, donor restricted funds, including those held under irrevocable gifts, may be modified.   Generally, such modification must meet the common law requirements under the doctrine of cy pres, which is partially codified in several Texas statutes listed below. The cy pres doctrine provides that a charitable trust may be modified by a court to effectuate the general charitable purpose of a donor or testator when his or her specific intention cannot be carried out. The common law doctrine of cy pres requires that any modification conform as near as possible to the donor’s original intent.

Some of the circumstances in which charitable gifts and funds may be changed or terminated include when:

  • The gift or trust instrument itself authorizes modifications.
  • The gift or fund has limited assets.
  • The named charitable beneficiary of a charitable trust is defunct.
  • The restriction has become illegal, impracticable, or wasteful; if it impairs the management or investment of the fund; or if, due to circumstances not anticipated by the donor, a modification of a restriction will further the purposes of the fund and a court grants the modification in manner that conforms as closely as possible to the donor’s intent.

Selected relevant statutes:

  • § 112.054, Tex. Prop. Code – Judicial Modification, Reformation, or Termination of Trusts
  • § 112.059, Tex. Prop. Code – Termination of Uneconomic Trust
  • § 113.025, Tex. Prop. Code – Authority to Designate New Charitable Beneficiary
  • § 123.03, Tex. Prop. Code – Notice
  • § 163.007, Tex. Prop. Code – Release or Modification of Restrictions on Management, Investment, or Purpose
  • § 255.451, Tex. Estates Code – Circumstances Under Which a Will May Be Modified or Reformed

Trust Decanting

A trustee with authority over the principal of a trust may distribute or “decant” all or part of the principal in that trust in favor of a second trust. The Office of the Attorney General must receive notice of any decanting if: (i) a charitable entity is entitled to notice; (ii) a charity entitled to notice is no longer in existence; (iii) the trustee has authority to distribute assets to one or more charities that are not named in the trust instrument; (iv) or the trustee has authority to make distributions for a charitable purpose described in the trust instrument, but no charity is named as a beneficiary for that purpose.

Selected relevant statutes:

  • §§ 112.071-112.087, Tex. Prop. Code – Distribution of Trust Principal in Further Trust