Ensuring Fiduciary Duty in Church Investments

Many churches, at times, find themselves with excess funds due to contributions, designated funds, or unspent income. Church leaders face the important responsibility of deciding how to handle these funds wisely. With fiduciary duties playing a critical role, it’s essential for church leaders to approach investment decisions prudently and in alignment with their legal obligations.

The fiduciary duty of due care requires church board members, treasurers, and leaders to act “in good faith, in a manner they reasonably believe to be in the best interests of the corporation, and with such care as an ordinarily prudent person in a like position would use under similar circumstances.” This principle, also called the “prudent person rule,” ensures decisions regarding church funds are made responsibly.

State laws often outline these duties within nonprofit corporation statutes. For instance, the Revised Model Nonprofit Corporation Act specifies:

When it comes to investing excess church funds, fiduciary duty ensures investments are made with care, avoiding undue risks. Importantly, leaders are not liable for every bad investment but must demonstrate reasonable diligence and informed decision-making.

Form a committee comprising individuals with proven financial expertise, such as CPAs, financial planners, and business leaders. Their recommendations, combined with the board’s approval, provide protection against poor investment decisions.

A formal policy helps govern investment decisions and prevents speculative ventures. It may outline restrictions, such as avoiding high-risk schemes or investments in organizations linked to board members.

Churches should steer clear of investments promising unrealistic returns. Any opportunity that sounds “too good to be true” likely is. Engage independent financial experts to vet opportunities thoroughly.

All investments should be regularly reviewed during board meetings. Keeping open communication and detailed records ensures accountability and allows for necessary adjustments.

Spreading investments across various financial instruments reduces risk. Mutual funds and diversified portfolios are often safer options.

Investments should align with the church’s values and mission, ensuring that they do not contradict its core principles.

In cases where church leaders serve as trustees of a specific fund, they are held to higher standards of care. Trustees must prioritize the fund’s purpose and manage assets diligently.

The U.S. Securities and Exchange Commission (SEC) warns against common fraud schemes targeting nonprofits, such as pyramid and Ponzi schemes. Be wary of excessive guarantees, secrecy, and complex claims. Conduct due diligence and consult independent advisors.

This duty requires church leaders to act responsibly and make informed decisions that prioritize the church’s interests.

Establishing an investment committee, diversifying portfolios, and avoiding speculative schemes are key strategies.

Leaders are only liable if decisions are made without reasonable care or due diligence.

Be cautious of promises of guaranteed high returns, excessive secrecy, and vague investment terms.

Church leaders have both legal and moral duties to manage funds responsibly. By following best practices, such as consulting financial experts, maintaining transparency, and adhering to state laws, churches can safeguard their resources and fulfill their fiduciary responsibilities effectively.

For further guidance on fiduciary responsibilities, visit IRS.gov or consult with experienced legal counsel familiar with nonprofit regulations.