Purpose Trust Definition and the Terms Around It

A purpose trust, in the plainest purpose trust definition, is a trust whose assets are held to achieve an objective instead of to benefit identified people. The trustee manages the assets for that aim, and someone other than a beneficiary, usually called an enforcer, can hold the trustee to it. Whether such a trust can exist at all, and how it is supervised, depends on the law of the seat, so the entries below are arranged alphabetically and each one shows where seats diverge.

Example: a family established in Zurich wants a trust that keeps a collection of historic instruments together and funds their upkeep. No child is meant to own them. That is a purpose, not a beneficiary class, and only some legal systems accept a non-charitable purpose of this kind.

A

Asset protection trust

A trust designed so that the assets are harder for the settlor's future creditors to reach. Statutes that support this differ widely, and the protection is one that has limits: courts can still examine timing, intent and the settlor's solvency. See the comparison in asset-protection statutes compared.

Automatic exchange of information (AEOI)

The system under which tax authorities receive account data about foreign residents from financial institutions in other countries. Its standard is the Common Reporting Standard (CRS). A trust with financial accounts is often caught, either as a reporting entity or through its controlling persons.

B

Beneficiary

A person who benefits from a trust, whether by fixed entitlement or by discretion of the trustee. A purpose trust may have none, or only incidental ones, which is exactly why it needs a separate mechanism of supervision.

C

Certainty of objects

The common-law requirement that a trust's aims or beneficiaries be defined clearly enough for a court to enforce them. For a purpose trust, the purpose must be stated precisely enough that a trustee, and an enforcer, can tell whether it is being served.

Charitable trust

A trust for purposes that the law treats as public benefit, such as education or relief of hardship. It is the oldest form of purpose trust and usually has its own supervisor. A non-charitable purpose trust is different: its purpose is private or specific. See charitable and purpose trusts: choosing a seat.

Common Reporting Standard (CRS)

The global standard behind AEOI. It obliges financial institutions to identify account holders' tax residence and report to their tax authority. For trusts, it is the reason the settlor, trustee and beneficiaries are all documented.

D

Decanting

Moving assets from one trust into another, so as to update terms, change the seat or fix an outdated deed. It depends on a power in the deed or in the governing law. See decanting a trust.

Discretionary trust

A trust in which the trustee decides who receives distributions, and when. Many purpose trusts are discretionary in how they spend on the purpose, within the limits set by the deed.

E

Enforcer

The person with standing to ensure a purpose trust is carried out. Because no beneficiary can sue the trustee, the enforcer takes that role. Many purpose trust statutes make an enforcer mandatory.

F

Firewall legislation

Rules in a trust's governing law that tell local courts to ignore foreign laws or judgments on questions such as heirship or the validity of the transfer. Their effect abroad is not certain. See firewall legislation.

Flee clause

A provision allowing the trustee or protector to move the trust's seat, or change its governing law, if the current one becomes unsuitable, for example after political change. See flee clause.

Foundation

A legal entity with its own personality, endowed with assets for a purpose. Civil-law systems use it where common-law systems use a purpose trust, which is why the two are often compared. See combining trusts and foundations across seats.

G

Governing law

The law that decides the validity, interpretation and effects of a trust. It can differ from the place where the trust is administered. See also proper law and seat below.

H

Hague Trusts Convention

The 1985 Hague Convention on the Law Applicable to Trusts and on Their Recognition. It defines a trust broadly enough to cover assets held for a beneficiary or for a specified purpose, and commits parties to recognise such trusts. See the Hague Trusts Convention explained.

I

Irrevocable trust

A trust the settlor cannot simply cancel. Purpose trusts are usually irrevocable in practice, since the purpose is meant to outlast the person who set it up.

L

LEFin (FinIA, FINIG)

The Swiss Financial Institutions Act, known as LEFin in French, FinIA in English and FINIG in German. Under Article 2, paragraph 1, letter b, trustees are financial institutions alongside asset managers. Under Article 17, paragraph 2, a trustee is anyone who professionally manages a separate estate, or disposes of it, in favour of a beneficiary or for a specified purpose, on the basis of a trust deed within the meaning of the 1985 Hague Convention. That wording is why a purpose is explicitly in view.

Letter of wishes

A non-binding note from the settlor guiding the trustee's discretion. In a purpose trust it can explain how the settlor understood the purpose. Its legal weight varies between seats.

N

Non-charitable purpose trust

A trust for a private or specific objective that is not public benefit, such as maintaining a property, an animal or a business culture. Traditional English law rejected these trusts; several offshore statutes now allow them, usually with an enforcer.

O

Offshore

A seat chosen for its legal framework rather than the settlor's residence. The word says nothing about legitimacy, and offshore seats are typically regulated and subject to reporting.

P

Perpetuity period

The maximum time a trust may last. Many seats limit it, while some relax or remove the limit for purpose trusts. Compare seats in perpetuity and duration limits by seat.

Private trust company

A company set up to act as trustee for one family's trusts. It can hold a purpose trust's assets without a commercial trustee, but regulation of such companies differs by seat.

Proper law

The law with which a trust is most closely connected, used when the deed does not choose one. See proper law of a trust.

Protector

An independent person holding powers over the trustee, such as the power to remove or appoint one. In a purpose trust, the protector and the enforcer may be the same person or different ones, depending on the statute.

Purpose trust

A trust created to carry out a stated purpose rather than to benefit named people. It usually has a trustee, an enforcer and a precise purpose clause. It can serve a family business, a collection or an objective that fits neither a will nor a company. Statutes such as the STAR regime and the VISTA regime are specialised forms of it.

Example of a jurisdictional difference: a Swiss-based trustee is supervised under LEFin whether a trust it runs benefits people or serves a purpose, but the trust's own validity depends on its governing law, not on Swiss law. A family would therefore choose a governing law that accepts the purpose, and a trustee at a seat that can administer it. See Switzerland as a trust seat.

R

Reserved powers

Powers the settlor keeps over a trust, such as approving investments. Too many can cast doubt on whether the trust is genuine. Rules differ by seat.

Revocable trust

A trust the settlor can cancel or amend. It is less suited to a purpose, since the settlor could redirect the assets.

S

Seat

The place where a trust is administered, or whose courts and regulator have the closest link to it. It may differ from the governing law and from where the settlor lives.

Settlor

The person who creates a trust and transfers assets to it, also called a constituant or Errichter. See settlor.

Situs

The place where an asset is located, which often decides which law applies to it, notably for land. See situs of trust assets.

STAR trust

A Cayman Islands form of trust that may pursue purposes or benefit people, with enforcement by named persons. See STAR trust.

T

Trust deed

The document that creates the trust and sets out its terms, powers and purpose. It is the first thing a regulator or bank asks to see.

Trust register

A record of the parties to a trust kept by an authority or by the trustee. Who can see it varies by seat.

Trustee

The person or company that holds and manages the trust assets under the deed. In Switzerland, a trustee acting professionally needs authorisation. Under Article 18 LEFin, one based in Switzerland must be a sole proprietorship, commercial company or cooperative registered in the commercial register. Article 19, paragraph 2, requires the trustee to manage the separate estate, maintain its value and use it according to its purpose. Article 20 asks for at least two qualified persons in management, and Article 22 sets a minimum capital of CHF 100,000, paid in cash, with appropriate security or professional liability insurance. Under Article 61, trustees are supervised by FINMA together with a supervisory organisation.

V

VISTA trust

A British Virgin Islands form of trust that lets the trustees hold shares in a company without a duty to manage it, so that directors can run the business. See VISTA trust.

W

Winding up

The end of a trust, whether at the expiry of its term, completion of its purpose, or by agreement. A purpose trust usually ends when the purpose is achieved or becomes impossible, and the deed should say where assets then go.