As its name implies, a purpose trust is a type of trust that you create and establish for a specific purpose. Unlike traditional trusts, which operate to benefit identifiable individuals or entities, purpose trusts exist to fulfill a particular goal without the necessity of identifiable beneficiaries.
Purpose trusts can be set up for any lawful purpose. Typical examples include the maintenance of a particular asset (like a work of art or historic building), the care of pets after the death of the owner, and charitable giving.
In the past, many jurisdictions deemed purpose trusts without identifiable beneficiaries as invalid because there was no one to enforce the terms of the trust. This action was due to the “beneficiary principle,” which required a trust to have ascertainable beneficiaries. However, many jurisdictions have now changed their laws to allow for certain types of purpose trusts, especially for charitable purposes.
State laws vary regarding purpose trusts. Currently, Delaware, South Dakota, and Alaska have provisions recognizing purpose trusts. Wyoming and Nevada also have favorable laws, with Wyoming allowing purpose trusts to own private trust companies. Other states are closely watching trends in wealth transfer vehicles, so it will be interesting to see if they will incorporate provisions to recognize non-charitable purpose trusts in the near future.
In the meantime, while providing for the care of particular assets—such as a pet, historic home, art collection, or valuable real estate—is still the norm for purpose trusts, we are starting to see them used more frequently for philanthropic goals, asset protection, segregating (risky) assets, and ownership of private trust companies.
Who Monitors a Purpose Trust?
Since a purpose trust doesn’t have ascertainable beneficiaries in the traditional sense, it must have a mechanism to ensure that the trust’s purposes are being carried out and the trustee is acting appropriately.
That key position is filled by the endorser, whose role is to monitor the trust’s actions and ensure trustee accountability. The enforcer can be an individual or corporate entity, but not a trustee of the trust.
The trustees of a purpose trust take on the responsibility and personal liability of the trust in the same way as any trustee. They must understand the trust document in terms of purpose, powers, and duties as they manage the trust’s assets.
Since the trustees may have regulatory exposure, they may need to engage and oversee various professionals, such as accountants, attorneys, or investment advisors, to assist in the administration of the purpose trust.
The enforcer is responsible for monitoring the trustees’ actions and confirming they align with the trust’s objectives. If they don’t align, the enforcer may have the right to remove or replace the trustees. And like any fiduciary, the enforcer must act in good faith and in the trust’s best interests.
How to Protect a Purpose Trust
If a purpose trust is used to own a private company or manage other assets, trustees and enforcers might be inclined to think they can use their directors and officers (D&O) policy to insure the purpose trust. However, since there is no corporate structure behind this financial vehicle, the D&O insuring agreements don’t apply. Also, the individuals serving as trustees are not working in their capacities as directors, officers, or employees of an insured entity.
On the other hand, a trustee liability policy is structured to provide insurance for wrongful acts committed by trustees. In some policies, the underwriter might need to amend the terms to include the enforcer role.
This task requires an underwriter who understands the purpose trust and the related duties—and agrees to make appropriate amendments to the policy. It would make sense to purchase different policies, one policy that insures the trustees and another that insures the enforcer to avoid insured-versus-insured exclusions.
|While purpose trusts are not available in all states, the structure is increasingly seen as a useful tool for families. It is important to note that each state’s trust laws can be nuanced and may change over time.|
If you’re considering a purpose trust or seeking more details about your state’s trust laws, we recommend you consult with an attorney familiar with trust and estate law. It is also crucial to contact an insurance broker who understands purpose trusts and can structure and price your insurance coverage appropriately.
If you have questions or wish to explore coverage, contact Judy Pearson to learn more.
Our 2024 D&O Looking Ahead Guide and webinar will help you anticipate and prepare for your next D&O insurance renewal—including tips on how you can take advantage of the current soft market and how to prepare for the next inevitable hard market.
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