Have you noticed that some corporations confusingly call their board members “trustees” and others call them “directors”? We have and we have noticed that among clients, the the terms tend to be treated as synonyms. In reality, they have very different legal meanings and implications.
These terms are similar in that they both refer to individuals who have a fiduciary duty to oversee the nonprofit organization. However, from a legal perspective, there are important distinctions. Under state law, the term “trustee” is used in relation to charitable trusts while the term “director” is used in relation to nonprofit corporations.
Trustees Subject to Higher Standards
Under most state’s statutes, a trustee of a charitable trust is held to a higher fiduciary standard than a director of a non-profit corporation. For example, a director of a corporation will generally only be liable for gross negligence, but a trustee of a charitable trust may be held liable for acts of simple negligence. Thus, even if a trustee acts in good faith, the trustee may still be personally liable for a negligent act whereas a corporate director will not.
Another difference is that a trustee also has a duty to account and render information to beneficiaries where a corporate director has none. Finally, under the laws of some states, trustees of charitable trusts are held to an absolute duty of loyalty to the trust and are prohibited from engaging in any self-dealing even if approved by the co-trustees. Depending on the tax status of a nonprofit corporation, directors may engage in transactions with the corporation so long as the conflict is disclosed and approved by the disinterested directors. These are only a few of the distinctions between corporations and charitable trusts.
Call a Director a Director
Ideally, the appropriate legal term should be used. While calling a corporate director a trustee will not automatically subject a corporate director to the higher standards applicable to trustees, doing so could make it easier for a litigant or regulator to argue the standards applicable to trustees should be applied. This risk should outweigh personal preference for one term over the other. At a minimum, if a different title is given to directors or trustees, it should be a defined term in the governing documents or trust agreement to clarify the individual’s true legal standing.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide. If you are seeking legal advice, contact firstname.lastname@example.org for information about our services.