Purpose trust
A purpose trust holds property for purposes rather than for beneficiaries, so an enforcer holds the trustee to account. Bermuda's Trusts (Special Provisions) Act defines the term for non-charitable purposes, while Jersey and Cayman use their own statutory language.
Definition in Bermuda law
The Trusts (Special Provisions) Act defines a purpose trust as a trust created for one or more non-charitable purposes, if those purposes meet the Act's conditions. They must be sufficiently certain for the trust to be carried out, lawful, and consistent with public policy. The trust must be created in writing.[5]
The Act states that the rule limiting how long trust capital can remain unexpended does not apply to a purpose trust. It also says that a purpose trust cannot hold an interest in Bermuda land, directly or indirectly.[5]
The Act provides that a purpose trust that fails its conditions is invalid, subject to its stated reservation for trusts created under other laws. It also identifies who may apply to the Supreme Court for an order concerning the trust, including a trustee and, unless the trust instrument says otherwise, the settlor.[5]
How Jersey and Cayman law use the term
Jersey's Trusts Law addresses trusts for non-charitable purposes and provides for an enforcer in relation to those purposes. Its terms require the appointment of an enforcer and provide for appointing a replacement when none is in office. The enforcer has a duty to enforce the trust in relation to its non-charitable purposes, and a person serving as trustee cannot also serve as that enforcer.[3]
Cayman's Trusts Act treats the related category as a special trust or power. Its objects may be persons, purposes, or both. Purposes may be charitable or non-charitable, in any number or kind, if they are lawful and consistent with public policy. Under that Part, a beneficiary does not have standing to enforce the trust solely by being a beneficiary; the Act assigns that role to appointed enforcers, whether or not they are beneficiaries, or to a person appointed by court order.[4]
Bermuda expressly defines the term for non-charitable purposes, while Jersey and Cayman address non-charitable purposes and special trusts using their own statutory language.[3][4][5]
Relation to the U.S. federal tax definition
The IRS regulation describes an ordinary trust under the Internal Revenue Code as an arrangement in which trustees hold title to property to protect or conserve it for beneficiaries under ordinary trust rules. It discusses beneficiary-focused arrangements and business trusts separately, and says that an arrangement's classification depends on its real character, not solely on its use of trust form.[2]
The regulation does not define the Bermuda, Jersey, or Cayman term purpose trust. The term in those laws describes a legal arrangement under their provisions; the IRS regulation supplies a separate federal tax description of trusts and business trusts.[2][5]
Data table for this infographic
| Group | Question or label | Description or rule | Result or source |
|---|---|---|---|
| Reference diagram · Trust classification | Domestic or foreign trust, then who is treated as owner | Two separate U.S. tax questions, followed by local statutory labels for trusts created for a purpose. | |
| Step 1 · Domestic or foreign trust | Court test | Is a court within the United States able to exercise primary supervision over the administration of the trust? | |
| Step 1 · Domestic or foreign trust | Control test | Do one or more U.S. persons have the authority to control all substantial decisions of the trust? | |
| Step 1 · Domestic or foreign trust | Both questions answered yes | Domestic trust | |
| Step 1 · Domestic or foreign trust | Otherwise | Foreign trust, any trust other than a domestic trust | |
| Control, as defined in Treas. Reg. s. 301.7701-7(d)(1)(iii) | Control | "the power, by vote or otherwise, to make all of the substantial decisions of the trust, with no other person having the power to veto any of the substantial decisions." The test considers all persons who have authority to make a substantial decision, not only the trust fiduciaries. | Treas. Reg. s. 301.7701-7(d)(1)(iii) |
| Step 2 · Treated as owned or not (a trust or any portion of a trust) | Grantor trust rules | Sections 671 through 679 (subpart E). The Form 3520 instructions count as a grantor any person treated as the owner of any part of a foreign trust's assets under these sections. | |
| Step 2 · Treated as owned or not (a trust or any portion of a trust) | Section 679 | Section 679 generally treats a U.S. person who directly or indirectly transfers property to a foreign trust as owner of the portion attributable to that property for a taxable year in which income or corpus may be paid to or accumulated for the benefit of a U.S. person, including if the trust were terminated that year. Exceptions include transfers by reason of death and transfers for at least fair market value. | |
| Step 2 · Treated as owned or not (a trust or any portion of a trust) | Section 672(f)(1) | The grantor trust rules apply only to the extent they result in an amount being "currently taken into account" in computing the income of a U.S. citizen or resident or a domestic corporation. | |
| Step 2 · Treated as owned or not (a trust or any portion of a trust) | Portion treated as owned under subpart E | Grantor trust, as to that portion | |
| Step 2 · Treated as owned or not (a trust or any portion of a trust) | Portion not treated as owned by another person under the grantor trust rules | Nongrantor trust, as to that portion | |
| Local statutory labels for purpose trusts · alphabetical, labels differ, none ranked | Bahamas | Purpose Trusts Act: "authorised purpose trust", a trust declared for a non-charitable purpose | statute |
| Local statutory labels for purpose trusts · alphabetical, labels differ, none ranked | British Virgin Islands | "trust for any purpose", defined by exclusion as a trust other than listed kinds, including a trust for the benefit of particular persons | statute |
| Local statutory labels for purpose trusts · alphabetical, labels differ, none ranked | Jersey | Article 12, "Trusts for non-charitable purposes", with enforcers under Article 13 | statute |
| Local statutory labels for purpose trusts · alphabetical, labels differ, none ranked | Mauritius | "non-charitable purpose trust", a trust having a purpose other than a charitable purpose | statute |
| Local statutory labels for purpose trusts · alphabetical, labels differ, none ranked | Seychelles | "purpose trust", created for non-charitable purposes, whether or not it has any beneficiaries | statute |
| Notes | Commentary and statute | The domestic-or-foreign question concerns the trust; ownership treatment under the grantor trust rules can apply to a trust or to a portion. Local statutes use their own terms, which are not U.S. classifications. | commentary |
| Sources | U.S. sources | IRS Instructions for Form 3520 (domestic and foreign trust; grantor) · Treas. Reg. s. 301.7701-7(d)(1)(iii) (control) · Treasury proposed regulations on foreign trust reporting (nongrantor trust definition; s. 679 discussion) · Cassra Minai commentary on section 679 · 26 CFR s. 1.672(f)-1 | |
| Sources | Local statute sources | Bahamas Purpose Trusts Act s. 3 · BVI Trustee Act s. 84 (purpose trusts) · Jersey Trusts Law Arts. 12 and 13 · Mauritius Trusts Act s. 2 · Seychelles Trusts Act s. 2 | |
Questions and answers
What does Bermuda law mean by a purpose trust?
It means a trust for one or more non-charitable purposes that meet the Act's conditions. The purposes must be sufficiently certain, lawful, and consistent with public policy, and the trust must be in writing.[5]
Does Bermuda law allow a purpose trust to hold Bermuda land?
No. The Act says that no interest in Bermuda land may be held directly or indirectly in a purpose trust.[5]
What role does an enforcer have in Jersey law?
The Jersey provisions require an enforcer for a trust's non-charitable purposes and provide for appointing a replacement if none is in office. The enforcer's duty is to enforce the trust in relation to those purposes.[3]
How does Cayman law describe trusts with purposes?
Cayman's Trusts Act calls a trust or power special when it meets the Part's stated instrument requirements. Its objects may include persons, purposes, or both, and purposes may be charitable or non-charitable subject to conditions.[4]
Does the IRS regulation define purpose trusts?
The IRS regulation describes ordinary trusts and business trusts under the Internal Revenue Code and does not define the term purpose trust. It describes ordinary trusts in relation to property held for beneficiaries.[2]
Related terms
- Charitable trust: A charitable trust holds property for charitable purposes, and trust laws relate it to purpose trusts and to the other categories of trust used in planning.
- Enforcer: An enforcer is a person given a role in relation to certain trusts. Jersey and Cayman law describe how enforcers are appointed, with their duties and rights.
- Trust duration: Trust duration is the period a trust may continue. The Hague Convention says applicable law governs duration limits and other trust terms for a trust.
Related guides and articles
- Foundations and trusts: legal structure: Foundations and trusts have distinct legal structures and roles. Legal personality, who has control, and who owns the assets all vary by each jurisdiction.
- What a trust means under U.S. and international law: Trust terms and structure, the Hague Convention's rules, and U.S. tax classification and limited reporting rules, all explained plainly for U.S. citizens.
- Reserved Powers in Trust Instruments: Trust instruments may reserve powers to a settlor or grant them to others, while listed statutes address their validity and whether a holder becomes a trustee.
Related pages
- Glossary: All terms.
- Enforcer
- Proper law of a trust
- IRS forms
Sources and data notes
- HCCH, 1985 Hague Trusts Convention. https://www.hcch.net/en/instruments/conventions/full-text/?cid=59. Retrieved .
- Internal Revenue Service, 26 CFR 301.7701-4. https://www.ecfr.gov/current/title-26/section-301.7701-4. Retrieved .
- Jersey Legal Information Board, Trusts (Jersey) Law 1984. https://jerseylaw.je/laws/current/l_11_1984. Retrieved .
- Cayman Islands Legislature, Trusts Act (2021 Revision). https://legislation.gov.ky/cms/images/LEGISLATION/PRINCIPAL/1967/1967-0006/1967-0006_2021%20Revision.pdf. Retrieved .
- Legislature of Bermuda, Trusts (Special Provisions) Act 1989. https://bermuda.fm/legislation/1591. Retrieved .
Dates in this block record when each source was read for this page.