By Nigel Rotheroe

All trusts are created for a purpose and so you may be wondering why people specifically refer on occasion to a “Purpose Trust” and how is that different from what you may consider a “traditional trust”; being one typically set up to benefit one or more family members?

One can look no further than the classic definition of what is a traditional trust given by the authors of Underhill and Hayton, [the] “Law of Trusts and Trustees” ¹ which defines a trust as being:

“….an equitable obligation, binding a person (called a Trustee) to deal with property owned by him (called Trust property, being distinguished from his Private property) for the benefit of persons (called Beneficiaries or, in old cases, cestuis que trust), of whom he may himself be one, and any one of whom may enforce the obligation.”

For a traditional express trust to be valid the trust deedof a trust must show evidence of the “three certainties” of intention, subject matter, and objects where:

• “Certainty of Intention” – meaning that it must be clear that the Settlor (the donor) wishes to create a trust. This is normally reflected by the signing of a suitably worded “express” trust deed.
• “Certainty of Subject Matter” – meaning that it must be clear what property is being gifted, i.e. placed in the trust and which is to be held subject to its terms as set out in the trust deed.
• “Certainty of Objects” – meaning that it must be clear who are to be the beneficiaries (the “objects”) of the trust. Trusts normally benefit more than one person and these are collectively referred to as the “Class of Beneficiaries”.

Courts in the UK and in other common law jurisdictions have repeatedly confirmed that there has to be individuals or other identifiable persons  who can benefit from a trust and consequently as a general principle it has not been possible to have a trust “for a purpose” other than those that were charitable.  The main reasons why non-charitable purpose trusts fail under English common law are uncertainty, enforcement, perpetuity, and public policy considerations.

However, there are exceptions at Common Law where non-charitable purpose trusts will be upheld, namely in respect of:

• Tombs and monuments – Provisions for the building or maintenance of tombs or monuments have been upheld as a matter of common law, although solely on the basis of ancient precedent.
• Animals – Trusts for the care of specific animals have been upheld.
• Quistclose Trusts – Where funds lent for a specific purpose are used for an alternative one and are thus deemed to be held (as a resulting trust) for the lender.

As a consequence of the restraints under Common Law a number of jurisdictions, such as the Isle of Man, have modified their own statutory laws to permit non-charitable purpose trusts.  The UK has no such legislation.

In the Isle of Man primary legislation is the Purpose Trusts Act 1996 (the “Act”, as amended).

The Act stipulates that a “purpose trust” means a trust for a purpose or purposes other than a trust that is for:

• the benefit of particular persons whether or not immediately ascertainable; or
• the benefit of some aggregate of persons ascertained by reference to some personal relationship; or
• charitable purposes, and for this purpose a trust shall not be treated as being for charitable purposes by reason only of the fact that the instrument creating the trust contains a gift or bequest of any part of the trust assets to a charity;

The Act further provides that for a non-charitable purpose trust to be established that:

• the perpetuity period of the trust is specified;
• the purpose or purposes of the trust:
• are certain, reasonable and possible;
• are not unlawful, contrary to public policy or immoral; and
• the trust is created:
• by deed; or
• by will which is capable of being and is admitted to probate in the Island or in respect of which letters of administration in the Island are capable of being and are granted; and
• there are two or more trustees, at least one of whom is a “designated person”; and
• the instrument creating the trust:
• appoints a person who is independent of the trustees to enforce the trust (the “enforcer’); and
• provides for the appointment, as soon as is practicable, of an enforcer in the event of a vacancy in the office of enforcer or in the event of an enforcer ceasing to be independent of the trustees or if for any reason the enforcer is incapable, unable or unwilling to act as enforcer; and
• the instrument creating the trust provides for the enforcer to have an absolute right of access to any information or document which relates to the trust, the assets of the trust or to the administration of the trust; and
• the instrument creating the trust specifies the event upon the happening of which the trust terminates and provides for the disposition of surplus assets of the trust upon its termination.

Where:

“designated person” means, inter alia, a person in the Island who is either legally qualified, a person able to undertake an audit of a public company or holds a Class 5 licence to provide trust services under the Financial Services Act 2008; and

”enforcer” has the meaning given by section 1(1)(d) of the Act being a person independent of the trustees.

As with other more commonly used types of trust, purpose trusts can be used in a number of ways for commercial, succession or tax planning reasons, including:

• Acting as a vehicle to hold shares in a Private Trust Company (“PTC”) where the PTC acts as trustee for a number of family trusts. Normally attractive to high net-worth families where the shares in the PTC fall outside an individual’s estate and it provides a greater degree of comfort about the composition of the board of directors of the trustee than would otherwise be the case if an unconnected company acts as trustee of a family trust.
• Holding shares in a family business and succession planning, where the trustees of the Purpose Trust act independently of family dynamics.
• Investing in family companies where economic performance is likely to be poor or uncertain and in such circumstances a trustee would normally have difficulty in making any investment and funding decisions.
• Creating a trust which has both philanthropic and charitable purposes.
• Social benefit or philanthropic projects (both public and private) which are not recognised as charitable (as they lack an element of public benefit, such as the building or maintenance of community facilities or areas, the preservation of monuments, and the furtherance of political purposes.
• The holding of “Special Purpose Vehicles” for a wide range of commercial transactions in a safe, flexible, and bankruptcy remote manner. This is typically in asset purchase or financing transactions (securitisation) where security is needed for an entity which finances the purchase or to keep the asset and corresponding liability from appearing on a purchaser’s balance sheet.
• Separating voting from economic control.
• Creating an escrow trust for the purpose of holding funds from a purchaser in escrow for the seller.
• Forming mutual funds as unit trusts, where hedge fund managers wish to eliminate any obligation to attend meetings of the companies in whose securities they invest.
• As a part of “orphan structures” in bond issues where the trustees wish to divorce themselves from supervising the issuing vehicle and the relevant special purpose vehicle has effectively no beneficial owner.

Alternatives to the Purpose Trust include Foundations and STAR Trusts neither of which are currently able to be established in the UK.