As is our tradition each January, several Warner attorneys attended the annual Heckerling Institute on Estate Planning, the country’s most well-respected educational event for professionals working in the trusts and estates area. The Institute offered in-depth coverage of important court decisions, tax changes and other developments in wealth planning.
In this first of two blog posts on the Heckerling Institute, we will share a planning strategy discussed at the conference that we are seeing as a “hot topic” in wealth and tax planning for high-net-worth clients and family offices: purpose trusts.
Purpose Trusts – Why are They Different?
Typically, a trust is created for the benefit of a named individual or group of individuals. A purpose trust, on the other hand, is created to achieve a specific goal or service a particular mission.
Originally, purpose trusts were created exclusively to achieve charitable goals. Over time, many states have begun to recognize the validity of trusts that benefit neither identifiable individual beneficiaries nor charitable entities, but rather serve a specific purpose not necessarily linked to either of the above.
Depending on the laws of your state, in addition to charitable purposes, these trusts can be used to plan for continued or future care; commonly, a purpose trust may be created to ensure the care of one or more properties, pets, cemetery plots or copyrighted property. A purpose trust may also be created to promote or continue a community’s economic growth or stability. More recently, and as the focus of the Heckerling discussion, these trusts are being used to facilitate succession planning by ensuring the business continues to operate after the death or disability of an owner.
How do Purpose Trusts Work?
Purpose trusts function like traditional trusts in that a trustee manages the trust’s assets according to the terms of the trust agreement. Some states limit the duration of the trust, while others allow perpetual purpose trusts.
To ensure that the trustee is carrying out the trust’s purpose, the trust’s creator needs to appoint an “enforcer,” an independent party who can notify the court if the trustee is not fulfilling its duties or, if necessary, remove the trustee.
Who Should Consider Creating a Purpose Trust?
Although trusts are commonly used for tax efficiencies or to easily transfer wealth to the next generation, purpose trusts are formed to achieve a specific purpose that is meaningful to the creator.
As noted above, purpose trusts are gaining popularity as family business succession planning tools. In situations where the next generation is not willing, interested, or able to take over the business, some or all of the ownership can be transferred to a purpose trust. The purpose trust can then realize a number of benefits, including preserving employee jobs, keeping a company private or continuing the creator’s wishes to keep an important personal mission moving forward. The trust’s “purpose” can be broadly or narrowly defined, depending on the creator’s goals.
When the stock of a company is placed in a purpose trust, the profits can be used for a variety of purposes such as growing the business or supporting a charitable organization that achieves the creator’s purpose.
