WHERE SHOULD YOUR TRUST CALL HOME?
One of the great aspects of Perpetual Purpose Trusts is their flexibility.
When a business owner decides to transition their company into trust ownership, they have broad latitude to decide how they want to define their purpose, who they want to engage in governance, and how they want to share economic rewards.
They also have to decide on more mundane (but very important!) details, such as where the trust should be incorporated.
For those new to Perpetual Purpose Trusts, the decision of where to “domicile” the trust might seem a simple one. Wouldn’t you just choose the state in which your company is legally registered and/or operating? The answer is, probably not.
Perpetual Purpose Trusts, like all trusts, are regulated primarily under state (not federal) law. And not all states are created equal when it comes to PPTs.
When choosing the appropriate jurisdiction for your trust, there are two things you need to be thinking about:
Does the state allow for perpetuity?
In other words, is there a limit on how long the trust can hold the asset (your company)?
Does the state allow for reducibility?
Some states give the courts the right to assess the value of the trust property, and to make a determination as to whether the value exceeds the amount they deem is needed for the trust’s “intended use.” Should they determine there is an excess, they may require the trust to unload/transfer some of the company’s assets.
You want to find the sweet spot where the answer to #1 is YES and the answer to #2 is NO.
To our knowledge*, there are only two states that currently fit that bill: Delaware and Oregon.
That said, there are 15 other states where perpetuity (or darn near close to it) are possible:
Kentucky, Maryland, Massachusetts, Nevada, New Hampshire, New Jersey, North Dakota, South Dakota, Wisconsin, Wyoming and Maine allow for a purpose trust to exist indefinitely.
West Virginia, Arizona and Connecticut allow for trusts to exist for 90 years, and Tennessee recently increased their limit from 90 to 360 years.
The majority of other states follow what is known as the “rule against perpetuity” that puts a limit of 21 years on all types of trusts.
It is difficult to find a state where reducibility by the courts is not allowed. We noted Delaware and Oregon already fit this description. Colorado does as well, but because they limit the lifetime of the trust to 21 years, they are not a viable option.
You may be wondering why so few states allow for perpetuity and have rules around reducibility. The short answer is that all trusts are not created equal. Perpetual Purpose Trusts use these “exceptions” as a means to permanently protect purpose and independence, and to share economic rewards more broadly with stakeholders. There are other types of trusts, however, that can be used to shield wealth, and the rule against perpetuity and reducibility are an attempt to protect against this. Learn more in our post on The Pandora Papers.
Fortunately, if you don’t have a trust-friendly statute in your home state, you can easily domicile your trust under the laws of another state. To do so you must establish a connection with that jurisdiction, which can be done by moving trust assets there, or by appointing a trustee who resides there. We recommend the latter.
* There is currently no comprehensive listing of trust laws by state. We were happy to learn that Susan Gary, Professor Emerita at the University of Oregon, has been working to research and catalog individual state statutes, to specifically answer both the perpetuity and reducibility questions. When that research is wrapped up, we will happily share it! (Side note: Professor Gary was instrumental in drafting the Oregon Stewardship Trust statute.)
