Introduction: A trust is generally organized to provide a benefit to particular individuals; whereas a purpose trust is organized to carry out a specific purpose and provides no benefit to any individual. The distinction is that while a trust has beneficiaries, the purpose trust has no current (only residuary) beneficiaries, which offers a unique planning ability in the formation of commercial organizations such as Wyoming LLCs holding owning a California LLC and the California registration requirements incumbent on the Wyoming LLC.
The purpose trust was historically established, in part, to provide for situations that generally could not be provided for using a common trust, e.g.:
More recent examples would be highly regulated firearms such as machine guns, aircraft and collectibles requiring expertise and experience in preservation, protection, and valuation (porcelain collections as an example) before liquidation.
A purpose trust could also be established to own the membership interests in a private family trust company so as to avoid potential conflicts of interest inherent in these structures and for the purpose of owning organizations holding assets in tax repugnant states with antiquated laws.
Law prior to Statutes : Prior to recent statutes, these trusts were called honorary trusts. They difficulty is that they were historically unenforceable if their purpose was not carried out and the residuary beneficiaries could petition a court to terminate the trust at any time.
Wyoming Statute: Wyoming has statutorily provided forpurpose trusts. Wyoming Statute 4-10-410 “non-charitable Trust without Ascertainable Beneficiary” legislatively provides that a trust may be organized (i) without a definite or definitely ascertainable beneficiary, (ii) for a non-charitable but otherwise valid purpose; (iii) enforceable by a trust advisor, a trust protector, person appointed in the trust or a court; and (iv) with property only be applied to the trust’s intended purpose. In Wyoming the trust may exist in perpetuity.
Transfer Taxation: A purpose trust can be created and funded during the owner’s life or at his or her death.
Conclusion: Given the unusual tax treatment associated with a purpose trust, the trust should be structured to minimize transfer and income tax issues.