An orphan trust is a charitable trust or foundation in which the original founders of the trust have died and left no heir or other family members who can carry out their wishes. Orphan trusts are usually under the stewardship of lawyers and banks, who can decide which charities receive funds from the trust.
Honoring Founders' Wishes
Though the creators of the trust or charitable foundation often give specific instructions on how its assets are to be used, the institutions that inherit the responsibility of administering orphan trusts do not always stick to the original founders' wishes. When local banks named as trustees of a trust are bought by multinational financial institutions, for example, the trust may be moved to another state and end up benefiting a community to which the original donors had no connection. In some cases, multinational banks administering orphan trusts have skirted the law by distributing less to charities so they can pad their profits with more management fees by growing the endowments. Some administrators of orphan trusts also have been accused of using the funds to assist charities and individuals to which the administrators or their family members have close ties. The state of Texas, aware of these problems, adopted a law in 2009 requiring a court order before an orphan trust that was established in the state can be transferred out of state for any reason. The law was put in place to make sure the deceased donor's wishes would still be honored if the trust were moved.
- Medioimages/Photodisc/Photodisc/Getty Images