Alexander A. Bove Jr. and Melissa Langa
BridgeTower Media Newswires
A first generation business owner experiences immense pride in taking a moment here and there to observe what the owner has built for his or her family and the business’s employees, and in many cases, where the company has been operated in a socially conscious manner, what the company has contributed to the community.
At the same time, the owner is forced to ponder the future of the company. Will children and other descendants carry it on? If so, for how long? Will there be a decision to sell? Or will the company be subject to a hostile takeover?
If children and grandchildren do try to carry on the business, will divorces, lawsuits, incompetence and estate battles upset the whole plan? Is there some way to guarantee that the business will continue long into the future, while providing benefits for the family, the employees and the community?
As planners, we craft for the business owner such well-known precautions as stock transfer agreements, mandatory forfeitures and other restrictive arrangements to safeguard the company ownership, but we all know how clever lawyers can dissect and disable the best-laid plans. Furthermore, the parties themselves could agree to modify or sidestep the agreement.
A little-known plan has been slowly surfacing around the world and gaining traction in the U.S., a plan that virtually guarantees the business owner’s objectives to carry on the business indefinitely while providing the desired benefits. This plan is centered around a perpetual purpose trust.
A traditional trust has a trustee, some assets or investments, and most importantly, one or more beneficiaries. The purpose trust, on the other hand, has a trustee and assets but no beneficiaries. Instead, it has a purpose.
The August 2018 Trustworthy Advisor column discussed in some detail the workings of a purpose trust, but to remind our readers with a simple example, a purpose trust might be established to maintain and operate a family compound.
The fact that one or more parties may indirectly derive a benefit from the trust (such as with the family compound) does not make them beneficiaries. They have no rights under the trust nor standing to bring a complaint. Who does? A party called the enforcer, whose duty it is to carry out the trust’s purpose. Thus, if there is no enforcer, the trust will fail.
In addition to the requirement of an enforcer, the purpose of the trust must be legal, reasonably attainable, and not against public policy, the last criteria meaning that it must not be frivolous or wasteful. Certainly the purpose of continuing a business is legitimate and attainable.
The design of a purpose trust, which has as its purpose the perpetual continuation of the family business, is a challenge. The provisions of the purpose trust must be carefully planned and thought-out so as to accomplish the owner’s objectives. These objectives typically include:
• Ensure retention and continuation of the business indefinitely;
• Allow family members and descendants to manage or participate in management of the business;
• Provide for benefits to family members in or out of the business, as well as other parties, such as charities;
• Protect against outside disruptions or exposure to loss of business ownership such as divorce, lawsuits, estate disputes and the like — which is achieved by having the ownership within the purpose trust; and
• Protect against sale of the business or hostile takeovers by outside investors.
Depending on the scope of the business and the family’s makeup, there could be a number of ways to accomplish the foregoing, and we touch on some basic ideas here to get the creative juices flowing.
Typically, the purpose trust is located in a jurisdiction that has abolished the rule against perpetuities and, importantly, has also abolished the rule against restraints on alienation.
Control, often in the form of voting shares, is in the hands of the trustees of the purpose trust by means of a sale, conversion, gift or contractual assignment to the purpose trust.
Non-voting shares are often held in a separate traditional trust for family members, who can benefit from dividends and distributions, and may also be held in a charitable vehicle to achieve the social goals of the business owner.
By drafting the purpose trust as a directed trust, an “advisor committee” comprised of family members or other stakeholders can participate in the business by directing the trustee in business operations. The trustee itself may be a committee made up of certain family members, key employees, independent advisors and the like as desired and felt sensible by the owner.
The purpose trust could include provisions for a trust protector to settle disputes or make changes in the event of unforeseen circumstances. And, as stated above, an enforcer (acting alone or by committee) would be charged with enforcing the purpose, which could mean taking action to prohibit a sale of the company or the relinquishment of its control.
Depending on the company structure and operations, there could be “subsidiary” entities, such as limited liability companies operating as part of the overall structure.
The idea may appear novel, but in fact there are over 100 European companies operating under this structure, and at least one in the United States. One of the most prominent and successful in Europe is Bosch; 0.01 percent of its shares representing 93 percent of its voting rights are owned by the Bosch purpose trust.
Thus, although in terms of perpetuity it would be an oxymoron to say that the idea is “tried and tested,” in terms of “how are we doing so far,” many companies can answer (and in the case of Bosch, after more than 50 years) “exactly according to plan!”
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Alexander A. Bove Jr. and Melissa Langa are shareholders at Bove & Langa in Boston, where they concentrate in domestic and international trust and estate law.
