Navigating the Shoals of Nonprofit Board Service: The Legal and Ethical Issues that Can Take You Off Course

Continuing with our reports from the 2016 Heckerling Institute on Estate Planning

Kathryn W. Miree of Kathryn W. Miree &Associates, Inc. spoke on how important not-for-profit board service is in our country. Board members serve a critical role in the complex network of not-for-profits that provide vital services to our communities. They have the critical skills, expertise, and funds to enable philanthropy. Charitable organizations in the U.S. contribute substantially to the quality of life in the U.S. In 2012, more than 1.4 million not-for-profits contributed $88.73 billion to the U.S.  economy (5.47% of the nation's GDP). These charities generated revenue of $1.65 trillion and held assets of $2.99 trillion. Not-for-profits employ 10.1% of the workforce.

Today's board members serve in an era of increased scrutiny from state attorneys general, federal agencies, watchdogs and donors. To serve effectively as a board member and avoid the personal impact of poor legal and ethical decisions require a clear understanding of applicable laws and the board member's fiduciary role. The fiduciary role focuses on exercising a high standard of care in managing the charity's assets. The board is responsible for setting the strategic direction for the organization and for thinking strategically as it makes decisions for the organization.

The key fiduciary responsibilities, which are largely codified in state statutes, are:

1. Duty of care, which requires a board member to participate in the activities of governance and provide operational and policy oversight. Directors must exercise a reasonable level of care in making decisions on behalf of the organization. This would include participating in board and committee meetings and reviewing the charity's budget, fundraising results, audited financial statements and investment returns. Directors are not generally liable for bad decisions, as long as the decisions were made in good faith and without a conflict of interest.

2. Duty of loyalty, which says that the director must place the interests of the charity above his/her personal interests. The focus is on disclosure, confidentiality and avoiding conflicts of interest.

3. Duty of obedience, which requires a board director to ensure that the charity carries out the organization’s mission, as defined in its governing documents. The director must comply with all applicable laws.

Ms. Miree also discussed several practical duties as detailed by the BoardSource publication, The Ten Responsibilities of Nonprofit Boards. These responsibilities include selecting, supporting, and evaluating the chief executive officer, monitoring and strengthening programs and services, and ensuring adequate financial oversight.

The IRS is the chief federal regulatory agency for not-for-profits. Charities apply for exempt status by filing the Form 1023. Charities annually file a Form 990 with the IRS. Directors have a responsibility to review the Form 990 prior to submission to the IRS. Also, after the Pension Protection Act of 2006, the IRS can now share information with the states. The role of the attorney general is to represent and protect the charitable interests in the state as well as enforcing the laws applicable to charitable organizations in the state.

In conclusion, board service plays a critical role in our society, and is often a rewarding personal experience. It is also important to note that there are responsibilities that come with being a board director. 

For more content stemming from the 2016 Heckerling Institute on Estate Planning, please click here

Marie Arrigo is a Tax Partner and Co-Leader of the Family Office Services Practice for the Personal Wealth Advisors Group which provides tax consulting and compliance services to family offices, individuals, trusts and estates, and closely held businesses.

* Required