Public Library Investments and the “True Trust” Escape Hatch

One of the many reasons public libraries like to collaborate with “Friends” groups on fundraising is the added flexibility Friends groups (and other non-governmental groups) have when it comes to money. For example, Friends groups:

• Can buy goods and services without competitive bidding;
• Can make decisions about money whose records are not subject to the Freedom of Information Law; and
• Can invest money without following the restrictions of the General Municipal Law (GML).

It’s this last one that impacts the question. Municipal, school district, and special district public libraries have to follow the GML’s requirements for investment of public money, and that takes a lot of options off the table.

This prohibition is so complete, it even stops public libraries from keeping donated shares of stock that don’t meet the requirements. Any stock that is received as a gift has to be liquidated (sold) and replaced with either cold, hard cash or a compliant investment.

Except investments in a “true trust.”

What is a true trust? For purposes of this question, a true trust is a gift where the beneficiary getting the money has ZERO control or ownership of the asset generating a payment but gets the benefit of the gift.

Here is an example:

After a 70 years as a successful designer of board games and a shrewd investor, Ms. Superflua Affluence dies. In her large and complicated will, Ms. Affluence leaves her local public library roughly one million dollars in shares of stock. However, not trusting the library board to manage the money, Ms. Affluence decides not give the library the money outright. Instead, Ms. Affluence puts her lawyer, Estee T. Planning III, in charge of the stock shares as a trustee. Ms. Affluence (from beyond the grave) further specifies that the library will never, ever, ever actually own the stock outright, but will get the benefit of the stock for ten years. After ten years of the library getting whatever revenue is generated, the stock shares will go to the local cat shelter, Whisker Pops, who will own it outright.[1]

That is a “true trust.”

In a true trust, the assets are never under the control of the library, but the library gets the benefit of the legacy. This is allowed by the interaction of two laws: General Municipal Law Section 11 (which put the rules about investments in place) and Estates Powers & Trusts Law Section 11-2.2 (which creates the powers of trustees).

Where does this complicated lore come from? In 1995, the Office of the State Comptroller issued Opinion No. 95-30, which set all this in motion. The Comptroller did not use a cat analogy but set things out pretty plainly: public libraries must follow the GML’s restrictions on investments, but a “true trust” managed under Estates, Powers & Trusts Law (EPTL) Section 11-2.2 just has to follow the EPTL’s requirements.

The reason the Comptroller had to lay it all out was that the law had recently been changed (in 1992) to specify that public libraries were subject to GML Section 11. Several times prior to the change, the Comptroller had clearly stated that public libraries could keep donated investments. When the Comptroller laid out the new requirements in 1995, he stated, “other prior opinions are hereby superseded to the extent inconsistent with the above.”[2]

Since three decades is a pretty short time span in Libraryland, it is possible that some public libraries still have investments that don’t meet the requirements.

If a public library finds that this is the case, this is a good one to bring to a lawyer. Depending on how the stocks were acquired, they could be in a trust; if they need to be converted, it is more important that it be done properly than quickly. This is not one to handle without experienced advice and guidance.

Thank you for a great question on a complex but critical bit of law!