Practicing with a purpose (trust)

Those of us with practices involving a good deal of (or only) estate planning often refer to that area of law as a constantly humbling experience. This is because we not only have the repeatedly changing tax laws to deal with, but also the relatively frequent introduction of new techniques and ideas that we must learn and consider incorporating into our practice.

For example, as a result of planning innovations, we may now employ in our practices trust decanting, asset protection trusts, spousal lifetime access trusts (or SLATs), and defective grantor trusts, to name just a few. And the two most recent to add to our toolkit are non-charitable private foundations and non-charitable purpose trusts.

The breaking news is that we now have a state - South Dakota - that has enacted the first "serious" purpose trust statute in the U.S.

Although more than 30 states recognize purpose trusts through adoption of the uniform trust code, or a variation thereof, the purpose trust laws in those states are merely token statutes that basically recognize the concept of the purpose trust but offer almost nothing more than the permitted duration of the trust, generally 21 years, and the requirement of an "enforcer."

A few states extended or abandoned the limitation period, but until now none has offered a "stand-alone" purpose trust statute.

Briefly, a purpose trust is a trust that is established to accomplish a purpose rather than provide for beneficiaries, as in the case of a "beneficiary" trust. For example, a purpose trust may be established to hold a controlling interest in a family business, or to maintain an art collection or a family compound.

One of the more common uses of a purpose trust is to acquire equipment that would be leased to a family business. At a later date, the business could acquire the equipment. In the meanwhile, neither the debt to acquire the equipment in the first place nor the equipment itself is on the business balance sheet.

A purpose trust must meet certain requirements to be valid and enforceable. The purpose of the trust must be attainable (and certain), lawful and not against public policy.

In addition, the trust must be enforceable, usually by a trust "enforcer." Without an enforcer, the trustee could freely do as he pleased without regard to the purpose, and unlike a beneficiary trust where the beneficiaries always have recourse to question the trustee, there would be no one to monitor the trust.

Thus, for the purpose to be enforceable, it would have an enforcer, either appointed by the terms of the trust or by a court.

Although a few purpose trust statutes in other jurisdictions do not require the appointment of an enforcer at the inception of the trust, in practice the trust cannot continue without an enforcer at some point; otherwise, it would not be a trust.

This is one of the problems we find with the South Dakota purpose trust statute. That is to say, it is not that there is no provision for an enforcer; it is that the enforcer is treated more like a bat boy than an umpire.

For example, the statute provides that the trust "may" provide for an enforcer, meaning that it may not, and that if no enforcer is appointed, the court "may" appoint one, again meaning that it may not.

And to confuse the matter further, the statute says that "no purpose trust may fail for want of an enforcer," apparently meaning - but not saying - that the court must appoint an enforcer. Or must it?

Next, interestingly, the only section of the statute that is stated in reasonable detail is the part dealing with removal of the enforcer by the trustee. It provides that the trustee may remove the enforcer for, among other things, "lack of cooperation and hostility between the enforcer and the trustee."

Thus, if the trustee isn't happy with the enforcer's efforts (although the statute is not clear as to just what those efforts should be), the trustee can remove him. Whose interests are we protecting here?

The statute also provides that the enforcer may be removed if he breaches his "responsibilities," but nowhere in the statute is there a description or definition of those responsibilities.

There are numerous provisions that would be helpful, if not instrumental, in the administration of the purpose trust, such as the rights and powers of the enforcer, but they are not present in this statute.

One that is present, however, the inclusion of which is perplexing, is the provision that unless otherwise provided in the trust or ordered by the court, no filings, reports, periodic accountings or separation of funds is required by the trustee. Although this is a "default" provision, it reflects the opposite of an intention to prevent the trustee from free-wheeling with the trust funds and trust assets without oversight.

One must credit South Dakota for its forward thinking in introducing a purpose trust statute, but we would not describe the law as a model for other states to follow. The good news is we understand that South Dakota is in the process of improving the statute to reflect some of the above comments.

More detailed statutes on the topic would be welcome, especially for the first-time drafter of a purpose trust. We hope that states will take the time to review existing detailed foreign laws and perhaps consult with experienced practitioners to ensure their statute is adequately purposeful.

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Alexander A. Bove Jr. and Melissa Langa are shareholders at Bove & Langa in Boston, where they concentrate in domestic and international trust and estate law.

Published: Wed, Aug 22, 2018

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