For Yvon Chouinard, there were, in his words “no good options” for achieving his family’s goals within a conventional strategy for his company, Patagonia. The subsequent and unprecedented move to ‘give away’ Patagonia, with profits from now on being used to help fight the climate crisis, not only fuelled the debate around philanthropy and the stewardship of wealth in the modern world, it also shone a spotlight on purpose trusts and how they can be effectively used by families with a clear vision for their wealth.
Many wealth owners are increasingly motivated by social and/or environmental purpose, and want to deploy their wealth for positive impact.
In simple terms, Mr Chouinard has settled the voting rights in Patagonia into a purpose trust and given his economic rights in the business (i.e. the profits) over to a US headquartered charity dedicated to combatting the environmental crisis, in a move expected to be worth around $1 million every year.
What is a purpose trust?
In contrast to a traditional trust which is, generally, established for the ultimate benefit of an individual or individuals, or a charitable trust, a purpose trust is an entity which is established to hold and administer assets in order to fulfil or benefit a specific non-charitable purpose. The definition of a purpose is broad and flexible, potentially including political, philanthropic or social interest aims.
The structure allows settlors to bake-in specific principles, values and objectives for the management of certain assets, as opposed to a more conventional trust which typically focuses on deriving value from those assets in order to provide benefits to individual beneficiaries.
These principles must be adhered to by the trustees, who can be held to account if they deviate from them. The structure is employed frequently to separate control of the assets from the legal person of the settlor and to keep control and adherence to the trust’s stated purpose centralised.
Though there have been some exceptions, English law has not embraced the purpose trust, principally due to a concern over a lack of anybody with legal standing to enforce the terms of the trust against the trustee (a ‘purpose’ cannot bring an action against a trustee in the way that a beneficiary can).
Fortunately, however, several jurisdictions do offer solutions, including the US (Patagonia was able to rely on US law).
In the US, purpose trusts are referred to in the Uniform Trust Act, which is adopted in most states. The general provisions of the Uniform Trust Code (UTC) provide specific language authorising purpose trusts.
The Code’s provisions are applied at the state level, frequently with some modifications between them. For example, while the Act puts a general time limit on purpose trusts of 21 years, several states (such as Delaware, South Dakota and Wyoming) allow them to be perpetual.
Elsewhere, a range of reputable international financial centres including Bermuda, Guernsey, Jersey, the Cayman Islands and the British Virgin Islands have also enshrined the purpose trust in law.
Bermuda was the first offshore jurisdiction to adopt legislation providing for valid non-charitable purpose trusts, and others then followed suit – with important commonalities and differences between them.
For example, in some jurisdictions, such as Bermuda, the trust deed may or may not provide for the appointment of an enforcer (a role that is similar to that of the protector in a traditional trust), but in others – notably under the Cayman Islands’ STAR (Special Trusts Alternative Regime) Trust provisions, as well as Guernsey and Jersey purpose trusts - at least one “enforcer” must be appointed as a legal requirement.
The STAR Trust regime also requires at least one of the trustees to be a licensed trust company or registered as a private trust company in Cayman. In Jersey, meanwhile, there is no requirement for the trust to be registered in Jersey or for the trust instrument, or its particulars, to be filed with any governmental or other authority, nor is there a requirement that the trustees be resident in Jersey.
When considering the potential use of the purpose trust, therefore, it is important to consider the range of options and jurisdictions available in order to select the option which best suits the needs and objectives of the settlor.
Wealth and purpose
Mr Chouinard has always been something of a reluctant business success, who has been quoted as saying he “never wanted to be a businessman” and that he was “horrified to be seen as a billionaire.” However, his views on what to do with wealth resonate more and more, especially as wealth is transferred down through the generations, bringing with it a major shift in priorities.
Some very wealthy families and individuals are increasingly seeing their privilege as bringing with it a responsibility to use wealth as a force for good, and to have a broader impact. Philanthropy has always existed of course, but increasing transparency over the sources of, and ultimate beneficiaries of, wealth, alongside greater visibility and prominence of major societal issues, not least climate change, as well as the public health response to Covid-19, have led to a shift in expectations and priorities.
There is also a growing recognition that aligning wealth with ‘doing good’ improves long term resilience, and builds intergenerational trust and cohesion.
Patagonia’s example demonstrates that a genuine opportunity exists for the trusts industry – and those jurisdictions that offer non-charitable purpose trusts especially – to help families satisfy that demand for purpose in line with their own agreed values.
There is a huge amount at stake – both in terms of the value of philanthropic activity we are seeing among today’s wealthiest people, and in terms of the benefit that can be delivered on a micro level or more widely to society and the planet.
Purpose trusts are nothing new, but Mr Chouniard has put them firmly on the map and it seems certain that they will continue to grow in popularity and prominence.