Although it can be said that every type of trust has a purpose, in that it exists to accomplish the goals of the trustor who established it, not every trust is actually a purpose trust. In fact, not every state allows purpose trusts–though a growing number do. Read on for an understanding of purpose trusts.
Identifiable Beneficiaries Not Required
Purpose trusts, unlike other types of trusts, do not necessitate specific beneficiaries, as attorney Judith Pearson of Woodruff Sawyer explains:
A purpose trust is a type of trust that you create and establish for a specific purpose. Unlike traditional trusts, which operate to benefit identifiable individuals or entities, purpose trusts exist to fulfill a particular goal without the necessity of identifiable beneficiaries.Purpose trusts can be set up for any lawful purpose. Typical examples include the maintenance of a particular asset (like a work of art or historic building), the care of pets after the death of the owner, and charitable giving. In the past, many jurisdictions deemed purpose trusts without identifiable beneficiaries as invalid because there was no one to enforce the terms of the trust. This action was due to the “beneficiary principle,” which required a trust to have ascertainable beneficiaries. However, many jurisdictions have now changed their laws to allow for certain types of purpose trusts, especially for charitable purposes.
Among the states that now recognize purpose trusts are Delaware, South Dakota, and Alaska. Laws in Wyoming and Nevada are also favorable for purpose trusts and “Wyoming allowing purpose trusts to own private trust companies.” As Pearson observes, “Other states are closely watching trends in wealth transfer vehicles, so it will be interesting to see if they will incorporate provisions to recognize non-charitable purpose trusts in the near future.” Currently, though typically established to ensure care for specific assets, including pets, historic homes, or art collections, some attorneys are now also seeing purpose trusts “for philanthropic goals, asset protection, segregating (risky) assets, and ownership of private trust companies.”
Enforcers, Trustees and Bonds?
Absent named beneficiaries in the usual sense associated with trusts, purpose trusts have an “endorser, whose role is to monitor the trust’s actions and ensure trustee accountability.” An endorser can be a person or a corporate entity. Purpose trusts do additionally have trustees, but the trustees cannot act in the enforcer role. In a purpose trust:
The trustees of a purpose trust take on the responsibility and personal liability of the trust in the same way as any trustee. They must understand the trust document in terms of purpose, powers, and duties as they manage the trust’s assets.Since the trustees may have regulatory exposure, they may need to engage and oversee various professionals, such as accountants, attorneys, or investment advisors, to assist in the administration of the purpose trust.The enforcer is responsible for monitoring the trustees’ actions and confirming they align with the trust’s objectives. If they don’t align, the enforcer may have the right to remove or replace the trustees. And like any fiduciary, the enforcer must act in good faith and in the trust’s best interests.
Regardless of trust type, as fiduciaries, all trustees are held to exceptionally high legal standards,“the most important of which are the duties of loyalty and care, and the duty to act in accordance with the terms of the trust agreement.” Given the gravitas of the role, trustee bonds are frequently required. A trustee bond is a specific type of fiduciary bond that protects the interests of the trust and its beneficiaries in accordance with applicable state law. As a leading national provider of many types of fiduciary bonds, Colonial Surety makes it easy and efficient to obtain a trustee bond. Just get a quote online, fill out the information, and enter a payment method. Print or e-file the bond from anywhere.
Good To Know: Trusts In General….
Generally, trusts are flexible estate planning tools which allow families to safeguard assets for the future, while providing for the periodic distribution of funds to named beneficiaries, based on the terms of the trust. Establishing a trust requires careful attention to details, including the type of trust that will best meet family goals and a trust agreement that comprehensively and specifically explains how the assets placed in the trust are to be managed and distributed. An overview of different types of trusts is available right here.
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