The Purpose Trusts Act 2015 (the “Act”) provides for the establishment of trusts for non-charitable purposes.

Historically, subject to limited exceptions, only trusts which had identifiable beneficiaries were recognised as valid, the rationale being that identifiable beneficiaries were required to enforce the trust against the trustees, that is, to ensure the trustees were administering the trust and discharging their duties properly. The Act contains provisions for the enforcement of purpose trusts (“Purpose Trust(s)”).

Therefore, under the Act, trustees may hold property on trust to carry out any specific purpose or purposes.

Any individual or corporate entity may create a Purpose Trust for any purpose or purposes providing the purposes are capable of being carried out and not contrary to public policy or unlawful. At least one of the trustees must be a licensed trustee. The trust instrument must appoint an enforcer and provide for the appointment of another enforcer on any occasion in which there is none. The Enforcer has an important role in ensuring that the purpose of the Purpose Trust are fulfilled and, typically, has some powers including that to remove and appoint trustees.

Purpose Trusts are exempt from the rule against perpetuities, meaning they may last indefinitely. The instrument which creates the Trust may, however, specify a date or event on which the trust will cease to be a Purpose Trust (a terminating event) and set out how the trust assets will be distributed on the terminating event.

Section 4 (2) of Act sets out the requirements for the purposes (the “Purposes”)of a Gibraltar Purpose Trust to comply with the Act:

“A Purpose Trust must have a purpose or purposes that are–

• capable of being carried out;
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• sufficiently certain to be capable of being carried out;
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• not contrary to public policy;
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•  not unlawful;
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• capable, subject to the exercise of any power of accumulation, of consuming the property held upon the trusts of the PurposeTrust;
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• does not benefit its trustees beyond the payment of fees for so acting as may be expressly provided for in the trust document.”

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Due to the lack of individual beneficiaries who have beneficial ownership of the PurposeTrust’s property, a non-charitable purpose trust is very much an “orphan vehicle” or a “non-owed vehicle” which can be used for a number of different types of transactions.  A Purpose Trust may be used in a number of ways for commercial, succession or tax planning reasons, including:

Where, for example, restrictive covenants have been entered into preventing a particular individual or company investing in certain areas, or companies, the investments may now be held within a Purpose Trust.

Because there are no beneficiaries to the Purpose Trust, a link cannot be established between the investor and the investment. If the trust were set up with a short life, then the assets would revert to the settlor on termination.

Purpose Trusts can be used to segregate investment funds or asset ownership within a subsidiary (as security from the lender) from group risk. They can also be used to hold assets which need to be isolated from commercial transactions.  

This is an acceptable form of asset protection. It is becoming common in ship and aircraft finance/construction and in leasing transactions. In all of these cases the trust ends when the loan is satisfied, while in the interim the lender/financiers’ cash flow is protected. The lender is further protected because the ownership of the subsidiary cannot change until the trust is terminated.

It is sometimes necessary to demonstrate that ‘control’ is not vested in a particular entity. Different classes of shares in a company can be created with voting control being in the hands of one party and dividend rights in the hands of another. Thus, voting shares may be placed in a Purpose Trust and the remaining shares held by the party seeking the economic benefit.

Some settlors of conventional trusts have concerns that control could be transferred to trustees over which a settlor has no influence. A Purpose Trust established to own a family trust company will usually overcome this difficulty. It enables the trustee to carry out its duties independently and gives assurance to the settlor that the board of directors of the trust company can be changed at anytime by the shareholders, that is, the Purpose Trust.

Another advantage is that on the death of the settlor the shares of the trust company are outside the settlor’s estate and will therefore not pass to heirs who might otherwise control the trust company in a way not intended by the settlor.

A Purpose Trust can also be used to hold the shares of a private trust company (“PTC”) which acts as trustee of, or otherwise provides trustee-related services to, a settlor’s family trust(s).  A Purpose Trust can act as the shareholder of the PTC in place of a settlor and/or of another family member in case where the direct holding of the shares might have tax consequences.

A classic example is the utilisation of a Purpose Trust to hold the shares in a private trust company in an attempt to avoid the professional trustee being viewed as the beneficial owner of the PTC. The Purpose Trust provides a shield between the professional trustee and the private trust company to create some degree of protection from potential liability.

Many structures creating international securitisation which in the past have used a charitable trust can now be set up using a Purpose Trust.

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Purpose Trusts cane be used to hold the shares in special purpose vehicles used in connection with securitisations and off-balance sheet transactions, particularly where the parties to the transaction would like the relevant special purpose vehicle to be ‘orphaned’ (have no beneficial owner).

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A trust may have social, though not charitable, objects. A Purpose Trust can be set up for public and private social benefit or philanthropic projects which are not recognised as charitable. For example, supporting a cryptocurrency or blockchain community, the building or maintenance of community facilities or areas, the preservation of monuments, and the furtherance of political purposes.

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Trustees of a non-Purpose Trust holding shares in family companies where the economic purpose is poor or uncertain, can sometimes experience difficulties. If instead a Purpose Trust were put in place ‘with the purpose of investing in Smith family companies’, the trustees would have no need to be concerned that their actions could be criticised as there are no beneficiaries to do so.

Succession Planning

Purpose Trusts can be used to hold the shares in a family business to aid with succession planning, with the trustees acting neutrally and independently of family dynamics.

Legacy Planning

A person’s legacy differs from their estate in that it represents more than the things a person owns; it embodies their purpose. For example, a person may have dedicated their life to eradicating malaria or supporting an art museum. A Purpose Trust can be used for such purposes.  

Three common goals of legacy planning are: (1) perpetual existence; (2) separating the principal of a person’s legacy assets from the revenue those assets generate; and (3) separating the management and control of a person’s legacy assets from the inheritors who benefit economically from the estate. A Purpose Trust can accomplish all three goals.

For example, in a traditional dynasty trust structure, there can be the problem of an ever-increasing pool of potential beneficiaries. Even if the Trustees are given complete discretion with regard to how and when (if at all) to make distributions to beneficiaries, the Trustees of the traditional dynasty trust still have fiduciaries duties to those beneficiaries. As a result, the beneficiaries have legal standing to bring a legal proceedings against the Trustees, which can put pressure on the Trustees or potentially frustrate the legacy plan. With a Purpose Trust, there are no beneficiaries to whom the Trustees owe a fiduciary duty or who have legal standing to bring a claim against the Trustees for any reason.  

Acceptance

International recognition must be considered. Will the courts of the jurisdictions of the situs of residence of the settlor and beneficiaries, and any other relevant jurisdictions recognise the Purpose Trust as a valid trust? Those states which have ratified the Hague Convention on trusts have undertaken to recognise trusts ‘for a specified purpose’.

Taxation

A taxable event occurs on the termination of the trust if the assets revert to the settlor. There may also be tax implications of the initial transfer of assets into the trust. In the case of assets which can physically be removed to Gibraltar, the taxation can be seriously mitigated and, in some circumstances, possibly eliminated altogether.