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Purpose Trusts – When Are They Valid?

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A purpose trust is a trust which has no beneficiaries and is instead established for a specified purpose. Under common law principles, a purpose trust will be declared void and struck down. This is because only legal persons are capable of possessing rights that attach to a trust, and the lack of beneficiaries of a purpose trust makes it difficult to determine who might be able to enforce equitable rights against the trustees.

 

Exception I - Charitable Trusts

However, there are a number of exceptions to this rule, the first is charitable trusts, which must be for the benefit of the public rather than for private individuals. Charitable trusts can be set up for the following purposes:

  • Relief of poverty;
  • Advancement of education;
  • Advancement of religion;
  • Any other purpose beneficial to the community.

There are a number of features of charitable trusts which distinguish them from private purpose trusts. For one, they are not subject to the rule on perpetuities and can therefore carry on indefinitely. In jurisdictions such as New Zealand, they can be enforced by the Attorney General, so as to circumvent the beneficiary rule. Generally speaking, the income of a charitable trust is also exempt from taxation. Jurisdictions such as the United Kingdom keep a register of charitable trusts which is available to the public.

In cases where the scope of a charitable trust lacks clarity but there is a clear charitable intention, the court may intervene and dictate how the trust should operate. However, for the avoidance of any doubt, a settlor may instead choose to set up a non-charitable, private trust which names specific charities or unincorporated associations as the intended beneficiaries. 

Related: Legal Capacity Of Trusts – A Must Read For Trust Practitioners

Exception II - Trusts Of Imperfect Obligation

The second exception to the general rule regarding purpose trusts are trusts of imperfect obligation. These trusts are allowed as concessions to human weakness or sentiment, for the following purposes: 

  • Erecting or maintaining monuments and graves;
  • Saying of mass in private (saying of mass in public falls within the scope of a charitable trust);
  • Upkeep of specific animals; and
  • Gifts to unincorporated associations or clubs (organisations with no legal personality).

Unlike charitable trusts, trusts of imperfect obligation are subject to specified perpetuities. Both types of trusts are similar to  a private trust in that they can be either inter-vivos or testamentary in nature.

Related: Using An Inter-Vivos Trust For Succession Planning

Private Benefit

In certain jurisdictions, statute allows for the creation of purpose trusts for broader purposes, including for private benefit. These trusts are useful for a settlor who does not want to confer rights upon beneficiaries, although they require an enforcer or protector who can ensure that the terms of the trust are being followed.

For example, they could be set up for the purpose of maintaining a family business, under which it would be contrary to sell shares in the business. By that mechanism, the settlor can be assured that the business will not be sold. Equally, a settlor may want to set up a private trust which owns the shares in the business for the benefit of their family; in that case the settlor anticipates that their family may require flexibility in the future and may at some stage need to distribute the assets and wind up the trust. 

As with charitable trusts, in cases where the scope of the purpose may be vague but there is a clear intention, the court may be able to intervene or give directions to the trustees, depending on the particular jurisdiction of the trust. 

Related: What Are Trust Protectors? 5 Commonly Asked Questions Answered

The Use Of Purpose Trusts

Ultimately, a purpose trust (if permissible at law) may be a useful way for a settlor to distribute their assets in accordance with their wishes. Appropriate professional advice should always be sought, and a settlor should also consider whether their wishes can be achieved through the use of a private trust.

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