PERPETUAL TRUSTS FOR SHARING VS. SHIELDING WEALTH

There’s no shortage of reasons to be pessimistic about capitalism these days. 

Since the pandemic began, almost 89 million Americans have lost their jobs, while at the same time, America’s billionaires have grown $2.1 trillion dollars richer, a 70%  increase in wealth. While the rich have gotten vastly richer, many lower income Americans have been hit hard with a loss of income and insecurity around necessities like housing and food.

Recent revelations from the Pandora Papers are shining a bright light on how this disparity has occurred. Released in October 2021 by the International Consortium of Investigative Journalists, the Pandora Papers is an in-depth exposé of how the world's rich and powerful have leveraged the financial services sector to hide their wealth from public scrutiny and to avoid taxes. They do this through the use of shell companies in tax havens like the Cayman Islands that cloak the ownership of assets. (Remember The Firm?) But there’s another common method, albeit not as well known: using trusts to hold assets.

How trusts can be used to hide wealth

Trusts are nothing new. They have existed in the U.S. for hundreds of years as a vehicle for holding someone’s assets for the benefit of other people, usually family members. Trusts are considered an advantageous method for passing wealth because estate tax can be substantially avoided, creditors or legal claims cannot get at the assets held in the trust, and they offer a level of anonymity.

In the last few decades, however, some U.S. states have been in competition with each other to attract lucrative trust management businesses by loosening their laws around trusts. For example, in most states, a trust must dissolve at some defined point in time, but several states have changed the laws to allow them to exist into perpetuity. Critics are concerned that such arrangements are just another way for the rich to have an unfair advantage and amass further wealth, expanding wealth inequality. 

However, every coin has two sides. 

Trusts of a different stripe

Not all trusts are set up for the purpose of shielding personal wealth. In fact, a new wave of business owners are using trusts to share wealth created by their companies more broadly with their stakeholders, for generations to come.

How is this different from the trusts used to shield wealth? Typically when company founders look to retire, they explore passing on their company to their heirs, selling their company either to an internal party such as a management buy-out, or selling to an external party such as an investor or larger firm. 

However, some business owners are forging a different path: self-financing the sale of their company into a specific type of trust, called a Perpetual Purpose Trust. In this type of trust, the assets held – in this case company stock and property – must be used to benefit an ongoing purpose, such as enabling the company to deliver on its mission and to serve all its stakeholders. By being established in a perpetual vehicle, the company can remain independent and able to deliver on its purpose as long as it remains a viable operating entity. There is no longer a need to find new ownership to sustain the business over time. 

Perpetual trusts are a neutral vehicle - what matters is what they are perpetuating. 

Designing trusts to democratize wealth

When a company is owned by a Perpetual Purpose Trust, the company operations and profit are legally bound to be used in the manner directed by the trust.

Founders interested in leaving a legacy,  furthering certain values, supporting social or environmental causes, and/or rewarding specific stakeholders, such as employees, specify this as the “purpose” in the trust agreement. The profits the company generates thereafter are used to further this purpose - either by being retained by the company in service of the mission, or by being shared with the stakeholders. The trust acts like a benevolent owner - it will never die, never retire, and never require  liquidity. Thus it has no need to extract profits, and it can steward the company with purpose for generations to come.

Examples of companies using trust ownership as a way to distribute wealth more broadly are popping up in various industries across the U.S.

• In 2016, Equity Atlas, a Portland, Oregon based mortgage lender set up a purpose trust to hold ownership of the company to benefit wealth building for both its clients and employees. To benefit Equity Atlas clients, the trust requires that the company must act in such a way as to guarantee that employee wages and salaries are capped at 115% of the market rate, which they believe protects clients from being overcharged. On the other hand, to create shared financial reward among employees, the trust requires that each year 30% of net income is paid in profit sharing. Read more on Equity Atlas in this case study prepared by the Grunin Center for Law and Social Entrepreneurship at New York University.

• In 2020, Firebrand Artisan Breads in Oakland, California set up a purpose trust to hold partial ownership of the company to protect its mission of reducing recidivism for formerly incarcerated and homeless individuals by providing employment and training programs. The trust requires Firebrand to contribute to building community wealth by prioritizing employment to those who have been marginalized from paid work opportunities. It also requires a portion of the company net income to be paid in profit sharing to employees.  Learn more about Firebrand Artisan Bread from an interview with its founder, Matt Kreutz, on our blog.

• In 2018, Organically Grown Company (AOA’s parent company), based in Eugene, Oregon set up a purpose trust to hold ownership of the company to benefit “sustainable agriculture and food systems.” The trust requires the company to use its operations to benefit five stakeholder groups including investors, employees, famers, customers, and community. In addition, the company has a cashflow waterfall outlined in its stock agreement that dictates how profits are distributed in a balanced way among the stakeholders. Learn more about Organically Grown Company’s model of “stakeholder capitalism” from one of its investors, Aner Ben Ami, here, and dive into the nitty gritty of the cash flow waterfall here

Paving the way for reform and new economic models

Ingenuity is part of the human spirit. Throughout history entrepreneurs have innovated where there is opportunity, in ways that have led to both broad and narrow benefit. The history and use of trusts represents this same spectrum. 

Trusts can be used as legal vehicles on the one hand to shield private wealth, and on the other hand, to share wealth more broadly.

For those looking to reform capitalism and create new economic models towards greater shared prosperity, or simply create and pass on the legacy of a values-driven business, trusts are a dynamic area worth exploring.