The Purpose of Purpose Trusts

The use of non-charitable purpose trusts is slowly beginning to surface in the United States. A non-charitable purpose trust is one which is established for a purpose rather than for specified beneficiaries. Such a trust has generally been deemed invalid because there is no beneficiary to enforce the trust, thus it was held that there could be no trust. The only type of purpose trust that has been recognized in the U.S. is the charitable trust, which although it has no specified beneficiaries, is enforceable by the attorney general of the particular jurisdiction in which the trust is being administered. Little by little, however, as offshore jurisdictions began to adopt legislation which allowed for a non-charitable purpose trust, the idea has been catching on in more jurisdictions, since the purpose trust can be useful in situations where it may be that the settlor would not want interference from beneficiaries. For instance, a purpose trust could be set up for the maintenance of property for business or other use, or for the furtherance of the business of a particular corporation, or for the management of a corporation, or as it is more commonly used, for off-balance-sheet financing for a business. For instance, a purpose trust would be established for a debt financed acquisition of a piece of equipment to be used in a business. The trustee of the purpose trust would then lease the equipment to the business, using the lease payments to pay off the debt, thus the equipment and the financing would not be on the balance sheet of the company. At the end of the lease period the asset would then be distributed as the parties previously determined. In the U.S., the Uniform Probate Code (UPC) and the Uniform Trust Code (UTC) both have provisions for purpose trusts, although the term of such a trust is generally limited to 21 years, unlike offshore purpose trust which may be much longer or even indefinite. Furthermore, not all states have adopted either the UPC or the UTC, but nevertheless, both provide a breakthrough in the recognition of such trusts here in the U.S. In addition, it is quite possible, now that the concept of such a trust has been accepted, to establish a purpose trust in an offshore jurisdiction and import the law to the U.S. having the trust administered here.