Puporse Trusts

To be enforceable, a purpose trust deed must so clearly define the purposes of the trust that a court may determine these purposes. Many purpose trust statutes require that the trust document name a trust Enforcer. The Enforcer acts much like a trust protector, and oversees the actions of the trustee to ensure that those actions further the purposes stated in the document. A Purpose Trust typically cannot have any beneficiaries, even contingent beneficiaries. All assets in the trust must ultimately be paid out towards the purposes of the trust as set out in the trust document.

Both the British Virgin Islands and Nevis have provided for purpose trusts in the trust legislation.

So What is a Purpose Trust? (Back to the top)

June 2000

Prior to the introduction of the amendment to the Trustee Act, with the exception of trusts established for charitable purposes, trusts had to be established for identifiable beneficiaries. The amendment now permits trusts to be established for non-charitable purposes – the “purpose trust”.

A purpose trust has been defined effectively by reference to what it is not. That is to say, it is not a trust for the benefit of an ascertainable person or group of persons, such a trust being what is generally known as a traditional private trust.

A traditional private trust is a relationship between the Settlor, who gives property to the Trustee, who then holds and administers that property for the benefit of the beneficiaries. The beneficiaries are entitled to enforce the trust in the court of equity which make the trustees meet their obligations. The result of this is that in order to constitute a valid trust, the direction to hold property for another must meet the test of the three certainties:

intention – the words used must demonstrate a clear intention to create a trust.
property – the settlor must clearly identify the property which is the subject matter of the trust
objects – the beneficiaries or purposes of the trust must be clearly identified

The requirement of certainty of objects and the rule of law that a court of equity will only enforce an interest in favour of a beneficial owner of the interest impeded the development of purpose trusts. There is, however, one major exception to these general rules – the “charitable trusts”. The courts will enforce a purpose trust if its purposes are exclusively charitable and are of a public nature. A trust which is for a mixture of purposes, only some of which were charitable, has traditionally been unenforceable at law and therefore void.

A trust was only be considered charitable if it were for:

• the relief of poverty;
• the advancement of religion;
• the advancement of education; or
• some other purpose beneficial to the community.

The courts have, in limited circumstances, upheld the validity of a number of non-charitable purpose trusts, including trusts for the creation and maintenance of monuments or graves, the maintenance of particular animals, and even the promotion of fox hunting. By and large however, these cases have always been considered as an anomalous class of cases and there are many more instances where trusts for exclusively non-charitable purposes have failed. It is also clear that the courts are increasingly reluctant to extend the boundaries of this class of trust.

The courts in the past have failed to uphold non-charitable purpose trusts on two main grounds.

• that the purpose or purposes of the trust are uncertain. See Re: Endacott [1959] where the Court of Appeal held that the gift was too wide and uncertain to fall within the anomalous class of cases in which trusts, although not charitable were held to be valid as being of a public character. 

• who has the right of enforcement? A trust creates an obligation, so there must be a correlative right in somebody to enforce it. In a traditional private trust, it is the beneficiaries and latterly, the Protector who enforce it. In the context of the charitable trust it has been the Attorney General who has assumed the responsibility of enforcement. But who is in a position to enforce non-charitable purpose trusts?

Development of Purpose Trusts

A number of offshore jurisdictions have recognised that trusts for non-charitable purposes may have some uses because it is a trust established for a purpose and does not have specific beneficiaries. In other words, a person is able to divorce himself or herself from beneficial ownership of the trust property while, at the same time, creating a structure which will serve a purpose useful to him or her.

Purpose Trusts in the BVI

The law dealing with purpose trusts in the BVI is contained in Section 84 of the Trustee Act. Section 84 of the Act specifies that a purpose trust (or what the Act calls a “trust for any purpose”) must satisfy the following requirements:

• The purpose must be specific, reasonable and possible;
  
• The purpose must not be immoral, contrary to public policy or unlawful;
  
• At least one trustee of the trust must be a “designated person” (hereinafter “the designated trustee”). A designated person is defined as a barrister or solicitor practising in the BVI, an accountant practising in the BVI who qualifies as an “auditor” for the purposes of the Banks and Trust Companies Act 1990, a licensee under that Act, or such other person as the Minister of Finance may designate;
  
• The trust instrument must appoint a person (who may be the protector) to enforce the trust. This person is known as the Enforcer. The trust instrument must also provide for the appointment of the Enforcer’s successor;
  
• The Enforcer must be a party to the trust instrument or must consent to enforce the trust in writing. The form of consent must be addressed to the designated trustee;
  
• And finally, the trust instrument must specify the event upon the happening of which the trust terminates and must provide for the disposition of any remaining assets of the trust on its termination.

Definition of a “trust for any purpose”

The Act defines a “trust for any purpose” as a trust other than one:

• that is for the benefit of particular persons whether or not immediately ascertainable, or
  
• that is for the benefit of some aggregate of persons ascertained by reference to some personal relationship”.

Some commentators have suggested that the definition of “a trust for any purpose”, by excluding trusts for the benefit of particular persons, might prevent trusts in which a person might indirectly benefit from being regarded as valid. Others, however, have pointed out that the purpose of excluding trusts for the benefit of particular persons is simply to ensure that anyone benefiting from the trust does not have locus standi to enforce the trust, and that this is not meant to exclude persons from indirectly benefiting from the trust. It is my view that this latter explanation is the preferred interpretation, as otherwise how can one provide for the disposition of surplus assets of the trust upon its termination, as is required by the Act.

Purpose trust in perpetuity

The rule against perpetuities and remoteness of vesting does not apply to BVI purpose trusts. This means that perpetual purpose trusts may be created, and it also seems that a purpose trust may take effect at a remote future date. But these provisions relating to perpetuities and remoteness obviously have to be considered in the light of the requirement that a “terminating event” has to be specified.

Relationship to charitable and other purpose trusts

Section 84 does not effect the existing law relating to charitable trusts. Similarly, non-charitable purpose trusts, which do not comply with the requirements of Section 84, are valid to the same extent that they were before Section 84 was passed.

Uses of Purpose Trusts

As explained, the principal feature of the non-charitable purpose trust is that is has no ascertainable beneficiaries. Beneficial ownership is not vested in the trustees as the trust is not for their benefit and there is no one else in whom beneficial entitlement to the trust property can be attached to. Strictly speaking the property subject to the trust cannot be said to belong to anyone beneficially. It is this characteristic, rather than the ability to set up a trust to further a purpose that has attracted the business community and a true purpose of a purpose trust may have little or no connection with its stated purpose. Accordingly, there are many estate planning exercises and commercial transactions that can make good use of this phenomenon including the following:

Conclusion

Properly structured purpose trusts have got important roles to play in valid tax planning. Whilst there may not be anybody with a real interest in challenging the trust’s validity, it is prudent to draft into a purpose trust as far as possible genuine purposes, which the Settlor should intend to confer some benefit and a portion however small of the trust assets should be used to further this purpose. This should prevent any allegation of sham, and allow the trust to be recognised as valid in other jurisdictions.