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Are We Missing the Purpose of the Purpose Trust? Advisors and Attorneys Shouldn’T Be Afraid of Using It

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Are We Missing the Purpose of the Purpose Trust? Advisors and Attorneys Shouldn’T Be Afraid of Using It FEATURE: PERSPECTIVES By Alexander A. Bove, Jr. Are We Missing the Purpose of the Purpose Trust? Advisors and attorneys shouldn’t be afraid of using it here are hundreds of family business planning disadvantage of their clients, who rely on them to know and family office specialists across the country and understand the latest and best planning ideas. A Twhose specialty is to perform all-around plan- conspicuous example of this is the purpose trust, which ning for closely held businesses, from tax planning to is a trust that exists to carry out a purpose, rather than succession planning, the latter in many cases being the for the benefit of individual beneficiaries. most important for long-term considerations.1 For the most part, these planning firms are typically made up The Purpose Trust of talented, experienced and well-educated individuals For a decade or more, estate-planning attorneys and whose mission is to keep the family and the family’s other advisors have been writing about the unique business on a path consistent with the owners’ objec- advantages of the purpose trust, particularly when tives. In doing so, they must make it their business to it comes to long-term planning for the closely held keep abreast of the latest developments related to the business,3 and yet, the business planning community field of family business planning. seems to have ignored it more or less completely, for A good example of this type of development is the no explainable reason. There’s a handful of exceptions private trust company.2 It wasn’t so long ago that a family here in the United States, where owners of closely held with a successful business and the wealth that accompa- companies have used a purpose trust in their planning, nied it was actually forced to use a corporate trustee (a but from all appearances, the ideas came from their legal bank or trust company) if it wanted to guarantee over- advisors rather than family business consultants. Please sight and management of its business and wealth over let me be clear, however. I’m not condemning the entire succeeding generations. Then, laws were passed that population of business advisors for not recommending allowed a “private” trust company (PTC) to be formed purpose trusts, because the estate-planning legal com- that provided greater flexibility in the management of munity has fared little better. Perhaps the answer may the PTC so that family members could actually partic- be that the main characteristic of the purpose trust is ipate in the management of the trust assets by partici- so contrary to the traditional trust we’ve been using for pating in the management of the PTC. Of course, there hundreds of years that there’s a natural reaction to reject are state and federal regulations, reporting and careful it. So, just what’s so unusual about the purpose trust planning to follow, especially to avoid estate taxes on that scares advisors and attorneys away, and what can the deaths of the participating family members, but the it accomplish for family businesses that can’t be accom- PTC has nevertheless become a favorite planning idea plished by the plain vanilla trust? of family business advisors. Unfortunately, not every good planning idea catches advisors’ attention, to the What It Can Do First, let’s talk about what the purpose trust can do that a traditional trust can’t. Let’s posit a not-so-unusual Alexander A. Bove, Jr. is a partner at the family business situation in which ancestors have built law firm of Bove & Langa P.C. in Boston a very successful family business, and their strong wish is to keep the business going for their family “forever.” The founding ancestors have three children and four 2 / TRUSTS & ESTATES / trustsandestates.com / OCTOBER 2020 FEATURE: PERSPECTIVES grandchildren. There are several key employees whose they have the ability to force the trustee to comply with input and administration are important to the business. the terms of the trust. Because the purpose trust has no Ancestors could recapitalize to voting and non-vot- beneficiaries, the enforcer stands in their shoes, but isn’t ing shares. The voting shares could be non-dividend a beneficiary. The enforcer may be likened to a referee paying, while the non-voting shares (common or pre- whose only interest in the game is to make sure the ferred) would receive dividends. The voting shares could trustee plays by the rules. be transferred to a purpose trust that would manage Because the enforcer is charged with overseeing the company through a committee of trustees, which and enforcing the trustee’s performance, it’s a corol- could include the children. The trust would prohibit a lary that the enforcer should have the right to request sale of the company, and there would be many more an accounting and any other information relevant to details, such as the selection and appointment of trust enforcers, appointment of key employees to the board of trustees or advisors, etc. and consideration of tax issues. Unfortunately, while there’s plenty The company could pay salaries to participating family members, and the company profits would go in part to of trust law to be found, there’s grow the company and in part to non-participating fam- ily members through dividends on non-voting shares. practically no purpose trust law to This arrangement could ensure the retention of the business for the family for generations into the future, as be found. well as avoid interference on account of family disputes, divorces, disabilities, lawsuits, incompetence or death. Importantly, the plan could also be structured so that the the trust administration from the trustee. Typically, reduced value of the voting shares of the business would the enforcer would even have the right to remove the materially reduce or avoid estate taxes in the parents’ trustee if the trustee breaches its fiduciary duty. So, estates and in all subsequent family estates. where would we find this and other laws that apply to the purpose trust? Unfortunately, while there’s plenty of Different From Traditional Trust trust law to be found, there’s practically no purpose trust As far as the difference between a purpose trust and a law to be found. Here in the United States, the concept traditional trust, the first and most significant difference of the purpose trust began for the most part with the between the two is that a purpose trust has no specified increasing desire of individuals to provide for their pets beneficiaries. Instead, it has a purpose, but the purpose on an individual owner’s death. Until the enactment of must be reasonably attainable, legal, not frivolous and relevant law, trusts for pets weren’t enforceable, because not against public policy. To illustrate, a trust established the pet wasn’t a beneficiary who could enforce the to capture and kill all the stray cats in a particular city trust. Thus, to have a valid pet trust, the law requires would be considered (by most) to be against public that the trust have an enforcer to see that the purpose policy and therefore void, while a trust established to of the trust (the care of the pet) was carried out. From capture all the stray cats in a particular city and place the the concept that a trust could therefore be created not cats in homes or shelters would be valid and enforceable, for individuals but for a purpose, thoughtful planners provided the trust wasn’t overfunded.4 And, speaking began to envision the creation of trusts for all manner of of enforceable, the second important feature of a pur- purposes without exposure to beneficiaries requesting pose trust is that it must provide for an enforcer. In the distributions or complaining about the performance of traditional trust, the beneficiaries are the enforcers, as the trust portfolio. 3 / TRUSTS & ESTATES / trustsandestates.com / OCTOBER 2020 FEATURE: PERSPECTIVES George Bernard Shaw’s Trust trust law,7 but even with its amendment, the law could One of the most famous and most often cited purpose stand further improvement. Oregon made the effort trusts was the one expressed under the will of playwright to get it right the first time and passed what it calls the George Bernard Shaw. One of the 47 clauses of Shaw’s Oregon Stewardship Trust Law in 2019.8 Drafted by will directed that a trust be established and funded to Professor Susan Gary of the University of Oregon Law develop a phonetic alphabet and to determine how School, the Oregon Stewardship Trust statute is cur- many people in the world used the English alphabet. rently the only law in the United States that thoroughly Although the English court held the purpose of Shaw’s covers the creation and administration of a purpose trust invalid as impossible to attain, Shaw’s will invol- trust established to hold a business. untarily did a great deal for the promotion of purpose Oregon (stewardship) purpose trusts must have a trusts, but unfortunately, not enough. Far more attention business purpose, so that at present one may not be used has been given by legislators to pet trusts than to non- for family real estate.9 Despite that, the statute provides pet purpose trusts. As a result, most states allow pet an excellent structure for the holding and maintenance trusts and have fairly detailed laws on the requirements of a business in a purpose trust, which, under this law, for a valid pet trust, while most of those same states have may be perpetual.10 In addition to the trustee and one or more enforcers, the trust must have a stewardship committee.
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