The announcement that Yvon Chouinard has given control of his $3 billion apparel company, Patagonia, to a Perpetual Business Purpose Trust, has generated a great deal of discussion about Purpose Trusts. The discussion centers around how the purpose of the trust can be enforced.
Two general points about trusts. First, to be valid, a trust must have identifiable assets and ascertainable beneficiaries (for a private trust) or ascertainable assets and a valid charitable purpose (for a charitable trust). Second the only persons who can enforce the terms of the trust (other than the Grantor) are people with a vested interest in the trust, either the beneficiaries of a private trust or the Attorney General with jurisdiction over a charitable trust.
The exception to the requirement that private trust have beneficiaries is a private (non-charitable) Purpose Trust. Purpose Trusts have existed for decades, if not centuries, but only in very limited circumstances. The most common are the Perpetual Purpose Trusts that maintain something specific; a living thing (a pet); a piece of real estate (a cemetery); or a tangible asset (an art collection). There is a few Purpose Trusts which have successfully held private family businesses, but not many. The Trust may make distributions to individuals, such as the caretaker of a pet, the maintenance staff of the cemetery or the curator of the collection, but those individuals are not the beneficiaries of the trust. There may be an informal interest from friends, family and the community at large in the maintenance of the pet or the property such that, may be social and moral pressure to enforce the purpose of the trust, but no one has legal standing to sue enforce the Trust’s purpose.
The scope of a private Purpose Trust is only limited by the Purpose of the Grantor in creating the trust. The objectives of the Trustees are not limited if the objectives fit into the Purpose, even if those objectives are not the implicit objectives of the Grantor when creating the Trust. For example:
- Grantor A creates a trust the purpose of which is to maintain family unity and good relations. One implicit objective of the Grantor might be to keep the family summer house initially transferred into the trust by Grantor A, but an equally valid objective might be to have the Trustees sell the property and by a summer house for each of the children of Grantor A as trying to share the use of one house actually harms the unity and good relations of the Family.
- Grantor B creates a trust for the purpose of maintaining the Grantor’s art collection art which the family now enjoys having hanging in their homes. The implicit objective of the Grantor might be to keep the art in the family homes, but the Trustees could, if it is the best way to maintain the collection, loan the collection to the Metropolitan Art Museum so removing the art from the family homes.
In the Patagonia situation, Chouinard’s purpose is that the profits of Patagonia benefit the environment, for employees and the community. What happens if the Trustees decide that the most profitable thing to do is to sell the company and invest in oil and gas limited partnerships (some of which are now returning 50% or more in 2022) and increases the profits distributed to the Foundation from $100 million to $1 billion annually (at least for a short time). If Mr. Chouinard is not around to object, then who does have the right to object?
In most states, the Uniform Trust Act provides only a cursory handling of the issue of enforceability in purpose trusts. The Act requires a Board of Trustees, that controls the Trust assets, an Advisory Committee, who can sue to enforce the purpose of the Trust, and a Trust Protector that can amend and even terminate the Trust. It does not address what an appropriate role of the Grantor, the grantor’s family and other interested parties, such as the employees of the business held by the Purpose Trust might have. It also does not answer the question of enforceability. Professor Charles Rounds has raised this exact question in his Loring and Rounds: A Trustee’s Handbook (2022) section 9.27:
“Would trust principles rather than agency principles constructively govern were such a private enforcer in the picture? If the enforcer is a true fiduciary, then the answer might well be yes. The problem, however, is that in the purpose-trust context the enforcer’s fiduciary duties would have to be owed externally to someone other than the “settlor,” otherwise we would have a redundancy. But to whom would they run? If the “enforcer” of a purpose trust effectively owes fiduciary duties to no one, then the enforcement mechanism is illusory; and, if the enforcement mechanism is illusory, so also is the Trust itself.”
There is no duty of loyalty running from the Trustees, Advisory Committee or Enforcer(s) of the Patagonia Purpose Trust to the private foundation, since the private foundation is not a beneficiary of the Trust. Is there a fiduciary duty running from the Trustees, as the controlling shareholder of the company, to the foundation, as a non-controlling shareholder? If so, can the foundation sue the Trustees to enforce the purpose of the Trust, or is it limited to sue only to those grounds that a non-controlling shareholder can sue a controlling shareholder in any corporation? Can the foundation, and so indirectly the Attorney General, sue to enforce restrictions on holding a closely held business interest in a charity?
In my opinion Estate Planners will have to do a lot more work on mapping out the specific scenarios that Patagonia Purpose Trust and the Private Foundation could possibly find themselves in in the future. They will also need to draft contingency plans if this structure later fails to either fulfill the Grantor’s purpose if the purpose trust, or the foundation, fails.
I doubt that many of the questions will be answered until the first big lawsuit. Until then, Purpose Trusts have worked in the past when the Purpose Trust, holds specifically identified real or tangible property for a clearly articulated purpose. This does not answer the questions raised by Professor Rounds, but there is some precedent on how the Courts may interpret the trust’s validity, and the enforcement of its purpose, in the future.