Purpose Trusts: An Alternative Succession Planning Strategy
A recent news article reported that Eddie Smith Jr., CEO of Grady-White Boats, has restructured his estate and succession plans so that profits from his privately owned company will ultimately support charitable causes. Grady-White is widely regarded as one of the most successful and respected powerboat manufacturers in the recreational marine industry. Annual profits are estimated in the tens of millions of dollars, and Smith's planning will direct those resources to conservation, health care and education initiatives.
Smith has stated that he was inspired by Patagonia founder Yvon Chouinard, who established a similar structure in 2022 to direct Patagonia's future profits toward environmental conservation and efforts to combat climate change.
A purpose trust is a trust established to carry out a specific purpose rather than to benefit one or more identifiable beneficiaries. According to public reports, Smith transferred the voting shares of Grady-White to a purpose trust that will hold those shares in perpetuity, while transferring the remaining shares of the company to a Section 501(c)(4) nonprofit organization. The purpose trust will oversee the company's governance, help ensure that it remains privately held and preserve the values and culture that have defined the business over several generations.
The nonprofit organization, governed by an independent board of directors, will receive the company's profits and distribute those funds in accordance with the mission established by Smith.
Although relatively uncommon in the United States, purpose trusts are attracting increased attention as a succession-planning strategy for owners of closely held businesses. They provide an alternative to selling a business outright or establishing an employee stock ownership plan (ESOP). Moreover, purpose trusts are not limited to large enterprises or ultra-high-net-worth individuals. They can be appropriate for businesses of many sizes and do not necessarily require an owner to transfer the business to charity.
Unlike a traditional trust, which is established for the benefit of identifiable beneficiaries, a purpose trust is created to advance a stated objective. In the business context, that objective may be to preserve the company's independence, maintain its culture, protect employment opportunities or ensure that strategic decisions remain consistent with the founder's values.
Purpose trusts may also be useful for vacation homes, farmland, ranches, timberland and other assets that an owner wishes to preserve for future generations. They can be particularly effective when family members have different views regarding the future of a business or other significant asset. For example, one child may wish to continue operating the family business while others may prefer liquidation and distribution of the proceeds. A properly structured purpose trust can provide a governance framework that minimizes conflict and promotes continuity.
Business owners and others who establish purpose trusts often gain peace of mind knowing that their vision for the business or property is more likely to endure beyond their retirement, disability or death. Employees, customers and communities may also benefit from the stability and continuity such arrangements can provide.
Purpose trusts can offer long-term continuity, protection against family disputes, preservation of important assets, and a means of expressing personal values through stewardship rather than merely through wealth transfer. They may be particularly attractive to individuals who wish to create a lasting legacy that extends beyond the distribution of assets.
Although many jurisdictions have liberalized their trust laws in recent decades, some states continue to impose meaningful restrictions on trust duration or the administration of noncharitable purpose trusts. Consequently, planners frequently look to jurisdictions with more flexible trust laws and favorable perpetuity rules. States such as South Dakota, Delaware, Nevada, New Hampshire and Wyoming are often considered for purpose-trust planning because of their modern trust statutes and administrative flexibility.
In addition to governance and succession considerations, advisors must carefully evaluate the tax implications of any purpose-trust arrangement.
The tax treatment of a purpose trust can be complex and depends on numerous factors, including whether the trust is charitable or noncharitable, the governing jurisdiction, the nature of the assets involved and the particular tax being analyzed (income, capital gains, estate or gift tax or transfer tax). In Smith's case, public reports indicate that no sale transaction occurred, and, therefore, no immediate gain was recognized on the transfer of the Grady-White shares. Unlike a conventional charitable contribution, however, the arrangement reportedly was not designed to generate a charitable income tax deduction. Advisors should recognize that the tax consequences of purpose trusts are highly fact-specific and depend upon the structure employed.
As clients increasingly seek to preserve values as well as wealth, purpose trusts may become an important addition to the estate planner's toolkit. While not appropriate in every circumstance, they offer a compelling solution for business owners and families focused on stewardship, continuity and long-term impact. For clients whose primary objective is preserving a business, a family property or a set of values rather than maximizing liquidity, the purpose trust deserves consideration as part of the succession-planning conversation.
About the Author
Ed Rodbro, CAP® is a Senior Charitable Estate Planning Advisor at the American Heart Association. Ed is based in Connecticut and serves New England, Pennsylvania, New Jersey, West Virginia, Virginia, Delaware, Maryland and D.C.
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