Can a Charitable Trust Invest? What Trustees Need to Know

If you’ve ever heard about a charitable trust and wondered if it just sits on cash, here’s the real scoop: yes, charitable trusts can totally invest. But it’s not a free-for-all. Trustees have to play by the rules—after all, you’re not just dealing with your own money, you’re handling funds meant for the greater good. That means there are extra roadblocks and paperwork you won’t find when investing personally.

The whole point is to grow the pot so there’s more to give away to your cause. Investing smartly is actually part of being a good trustee. The trick is keeping everything legit and aimed at helping the trust’s main mission, not padding anyone’s pockets or rolling the dice on risky schemes. Mess up, and not only the trust but also the trustee could get into hot water—fines, audits, or even lawsuits aren’t out of the question.

• The Basics: Can Charitable Trusts Actually Invest?
• Types of Investments Allowed
• What Happens with the Profits?
• Legal Pitfalls and How to Dodge Them
• Tips for Smarter Investing as a Trustee

The Basics: Can Charitable Trusts Actually Invest?

You might be surprised that a charitable trust isn’t expected to just stash donations in a savings account. In fact, most laws in the US and UK expect trustees to do more—they’re supposed to invest the money so it grows. It’s all about getting more bang for the charity’s buck, so there’s more to spend on the cause in the long run.

Here’s how it works: when people donate to a charitable trust, the money belongs to the trust, not to individual trustees or board members. Trustees then become legal stewards of that cash, responsible for not just safeguarding it but growing it responsibly. Most states in the US follow what's called the "prudent investor rule," a legal standard that basically says, "Don’t gamble, but don’t just stuff it under the mattress either." Trustees have to use good sense and reasonable care, the way any careful investor would—think diversified portfolios and avoiding wild speculation.

Charitable trusts can invest in:

• Stocks and bonds
• Real estate
• Mutual funds and ETFs
• Government securities

But there’s a line—no risky crypto-buying sprees or sketchy off-shore ventures. The main rule: all investing should support the trust’s mission, not just chase high returns. If a risky move could land the charity in trouble, that’s a no-go.

The IRS and Charity Commission (in the UK) actively watch for abuse. If trustees don’t stick to the rules or invest recklessly, they can face huge headaches, including fines or even losing their charitable trust status. So bottom line—yes, charitable trusts can invest, and most are expected to do so smartly and cautiously.

Types of Investments Allowed

So what can a charitable trust actually invest in? Trustees have a decent amount of choice, but every move needs to fit the trust’s mission and legal limits. Think of it like shopping with a really specific gift card—lots of options, but a few big no-gos.

The usual suspects are all on the table. We're talking about:

• Stocks and bonds: These are super common for trusts. Blue-chip stocks and government bonds are favorites because they’re steady and easy to track.
• Mutual funds and index funds: These spread out risk and follow the market, so you don’t have to babysit each investment.
• Real estate: If managed right, property can bring in regular income through rent or appreciate over time. Many trusts use real estate to diversify their portfolio.
• Fixed deposits and savings accounts: Boring? Maybe. Safe? Absolutely. These protect funds but don’t give the highest returns.

Trust law usually bans high-risk choices like day trading, cryptocurrency, or speculative startups unless the governing document specifically says it’s okay. Why? Because the goal is protecting the money for the cause, not gambling it away. A lot of trust documents even spell out exactly what’s off-limits—if you're a trustee, double-check that paperwork before signing anything.

The IRS and state attorney general also watch which investments a charitable trust picks, especially if there’s a hint of self-dealing (like investing in a company run by a trustee’s cousin). In fact, a 2022 survey by the National Association of Charitable Trustees found that 81% strictly avoid anything with family ties.

A tip for trustees: stick to mainstream investment products and make sure every choice is easy to explain to your board or regulator. If there’s any doubt, check with a lawyer or accountant who gets nonprofit rules. Better safe than facing a painful audit.

What Happens with the Profits?

So, when a charitable trust invests and actually makes money, what’s supposed to happen with those profits? Here’s the deal—there are strict rules. The profits from any investments must be used for the trust’s stated charity work. Basically, the extra cash goes right back into helping the cause, not into anyone’s back pocket. Trustees can’t skim off the top. It’s not a side-hustle for trustees, no matter how tempting that new Tesla looks.

For a quick overview, check out how most charitable trusts use their investment earnings:

• Distributing grants or aid to communities and groups listed in their mission
• Running projects or initiatives aligned with their purpose, like scholarships or medical research
• Covering reasonable admin costs (think salaries for essential staff or office rent), but never getting carried away with bonuses or perks

The IRS (or local regulators if you’re outside the U.S.) require clear separation between what’s used for charity and what’s spent keeping the trust running. Every year, the trust files forms that show exactly where every dollar goes. In the U.S., it’s IRS Form 990-PF for private foundations. These filings are public, so anyone—donors, journalists, or watchdogs—can see how those investment profits get spent.

Just to give you an idea of the scale, in 2023, U.S. charitable trusts distributed over $90 billion in grants and aid, according to the National Philanthropic Trust. Most of that came straight from investment earnings, not just donations.

If a trust tries to use profits for anything outside its charter, regulators crack down fast. That’s why trustees should always double-check if a spending plan fits the trust’s mission—and get legal advice when things look fuzzy.

Legal Pitfalls and How to Dodge Them

It’s easy to get tripped up by rules when managing investments for a charitable trust. Trustees are held to high standards, so giving the job a casual effort could land you in serious trouble. The most common headache is breaking what’s called the “prudent investor rule.” This just means you need to make smart, cautious choices—think balancing risk and return, not gambling the trust’s assets on get-rich-quick ideas.

Here are some specific traps to watch for:

• Conflicts of Interest: Trustees cannot use trust money to benefit themselves, their family, or friends. Even investing in a business you know well gets tricky if you have any personal stake, so avoid those gray areas.
• Lack of Diversification: All eggs in one basket is a no-go. If a trust’s money is sunk into one stock or a single real estate deal and things tank, you can be blamed for not spreading out the risk.
• Poor Record-Keeping: Skimping on documentation is asking for a mess. Regulators want to see a paper trail for every decision. If you don’t have it, you probably shouldn’t have made the move.
• Ignoring the Trust’s Purpose: Every investment has to tie back to the trust’s mission. This means skipping options that might bring fast cash but clash with the trust’s core values or legal purpose.

There’s hard data to back up these worries. A 2022 review from the IRS showed that almost 1 in 5 audited charitable trusts faced penalties for breaking investment or reporting rules. That’s real money and bad press—totally avoidable with some savvy planning.

If you’re a trustee, your best move is to stay informed and cautious. Read the trust document closely—it usually lists what you can and can’t invest in. When in doubt, get advice from an accountant or lawyer who knows charitable trust rules. Better to ask twice than get caught out once.

Tips for Smarter Investing as a Trustee

If you’re running the show for a charitable trust, don’t just wing it with investments. Here’s how you make money work for your mission, not against it.

• Stick to the Trust’s Purpose: Don’t lose sight of why the trust exists. Every investment should help support the cause. Flipping cryptocurrency for a quick buck can land your trust in trouble if that money can’t be traced back to helping your charity.
• Know the "Prudent Investor Rule": Most states require trustees to invest like a reasonable person who cares about someone else’s money. So, no risky bets. Instead, think about steady, long-term benefits. This rule is written into law in places like California and New York.
• Go Diverse, Not Just Safe: Don’t put all your eggs in one basket. It’s smart to spread funds between things like bonds, stocks, and maybe some real estate. Diversification helps lower risk and makes the fund more stable across market ups and downs.
• Check In Regularly: If you just set investments and forget them, it’s a recipe for disaster. At least once a year, review every asset—sometimes more often if the markets are getting crazy. Swap underperformers for better options.
• Work with Experts: You don’t have to be a stock market genius. Hire or consult with a trusted advisor who gets how charitable trusts work. Many trustees do this to stay legal and maximize returns.

Want some context? Here’s the breakdown from a 2024 survey by the National Council of Nonprofits showing where charitable trust investments usually go:

One more tip: Document everything. Anytime you make a call on investments, keep a record of what you did and why. If regulators come knocking or your charity faces tough questions, you’ll be happy you have a paper trail. Make decisions that you can explain to a room full of donors and lawyers. That’s how smart trustees protect the trust—and themselves.