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The Legal Stuff Underneath Perpetual Purpose Trusts
Some legalese you probably won't read, a short summary you might, collected mostly for future reference
The background. I am not a trust lawyer—I’m not even a lawyer. But to get a better understanding of perpetual purpose trusts (PPTs), I went looking for some legal(ish) writing on PPTs.
The short version. Perpetual purpose trust is not a legal designation, but rather a descriptor of trusts that are (a) perpetual and (b) serve a purpose rather than a human beneficiary. They are legally a type of noncharitable purpose trust, which until recently could not be perpetual and (maybe?) had to have a human beneficiary. Only certain states have laws that allow for this kind of trust.
Some folks promote PPTs as a type of steward ownership, an umbrella term that can include foundation ownership, golden share ownership, and other models. In this sense, they are new expressions of very old visions of ownership.
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The long version. To start, I read back through the article on trusts on Investopedia, the website that taught me about early stage investing in the early 2010s (thanks Steve Hardgrave!).
Then I started looking for legal(ish) presentations about perpetual purpose trusts. The first one I found was Stewardship Trusts as a Tool for Business Planning and Succession, a 2020 presentation by Susan Gary at University of Oregon School of Law, with help from Natalie Reitman-White (Organically Grown, a PPT; and Alternative Ownership Advisors) and Ronald D. McFall, Partner (Stoel Rives, a law firm).
What is the legal structure? PPTs are a “Noncharitable, irrevocable purpose trust, with no beneficiaries,” called stewardship trusts in Oregon law.
What makes it perpetual? “As the majority owner, the Trust does not expect to extract a profit, nor is its goal to maximize its stock value in preparation for an ‘exit’ since the trust intends to hold the company stock into perpetuity.”
Does it offer tax advantages? Not in the US. “Distributions from company to trust are taxed at highest individual rate.”
Who finances these? Organically Grown’s conversion was financed in part by RSF Social Finance.
Susan N. Gary, The Oregon Stewardship Trust: A New Type of Purpose Trust that Enables Steward-Ownership of a Business, 88 Univ. of Cincinnati L. Rev. 707 (2019) http://ssrn.com/abstract=3426845.
Susan N. Gary, The Need for a New Type of Purpose Trust, the Stewardship Trust, 45 ACTEC Law J. 701 (2019). https://scholarlycommons.law.hofstra.edu/acteclj/vol45/iss1/8/
I wanted to get a little more information on “noncharitable trusts,” which didn’t have a dedicated Investopedia article. I settled on a 2016 paper by law professor Richard Ausness, Non-Charitable Purpose Trusts: Past, Present, And Future, which leans heavily on The Purpose of Purpose Trusts by Alan Bove (2004).
Noncharitable trusts in the US are a type of purpose trust. Purpose trusts have historically been charitable trusts, but now they can be “private or noncharitable.”
As best I can tell, before 2000 noncharitable purpose trusts had to have a fixed duration, while charitable purpose trusts could be set up in perpetuity. Then “in 2000, the Uniform Trust Code introduced a more robust version of the purpose trust which resolved both the enforceability and the perpetuities problems.”
This is too deep in the legal weeds for me—if you understand it all, please let me know! I think the upshot is that the establishment of a perpetual, noncharitable purpose trust without a clear (human) beneficiary is relatively new, one made possible by changes to the Uniform Trust Code in 2000.
That Uniform Trust Code is not actual law, but a set of best practices that can be adopted by states and other jurisdictions. From that 2004 Bove article:
“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… 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.”
Steward Ownership: A short guidebook to legal frameworks is a document put together in 2020 by a group of NYU law students for the Purpose Foundation in Germany. Helpful from that document was a bit of clarity on the fact that perpetual purpose trusts is not a legal designation, but a combination of characteristics that is only possible to pull off within a handful of states:
“In the U.S. only five states (Delaware, New Hampshire, Wyoming, Oregon and Maine) have trust laws that meet all the criteria for a PPT. In the other states, laws do not allow a business trust existence in perpetuity and/or require that trusts serve the interest of a trust beneficiary. However, it is possible to incorporate your client’s business in a jurisdiction with trust law that allows for the PPT, even if your client does business in a different jurisdiction.”
This report mirrors (or is mirrored by?) this page on steward ownership by Denizen, the entry on steward ownership on Impact Terms, and in the governance recommendations section of a 2020 policy report by the American Sustainable Business Council, all of which situate perpetual purpose trusts as one type of steward ownership. Other types of steward ownership, quoting here from Denizen, include:
Golden share: among three types of shares, steward-shares, non-voting preferred shares, and the golden share, the golden share has right to veto all decisions that would undermine a commitment to steward ownership, held by a veto-service foundation
Trust-foundation: separates voting rights and dividend rights completely by placing them into two separate legal entities: dividend rights in a charitable entity and voting rights in another legal structure (Patagonia's model)
Single foundation: business owned by self-governing nonprofit, run by two boards -- corporate council w controlling rights and charitable board with rights to distribute dividends to charitable causes.
Trust-Partnership: trust owns 100% of the company for the benefit of the partners (usually employees)
Mapping the State of Social Enterprise and the Law is a 2019 report from the NYU Center for Law and Social Entrepreneurship.
It offers an overview of steward ownership and perpetual purpose trust ownership, including case studies of Organically Grown and Equity Atlas, both PPTs.
Regenerative Business and Steward Ownership: A New Example for Passing On Your Business is a 2020 presentation by Sarah Joannides of Alternative Ownership Advisors.
It walks owners through trust ownership, perpetual purpose trusts, and employee ownership trusts.
It includes case studies of Organically Grown, Grand Central Bakery, and Local Ocean Seafoods.