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George F. Bearup, J.D. Senior Legal Trust Advisor

27-Sep-22

Stewardship Trusts

Take-Away: The newest ‘thing’ in the world of trusts is a stewardship trust. It  is a special type of purpose trust that is intended to hold an operating business in perpetuity.

Background: In the past we have covered what is a purpose trust,  [MCL 700.2722] which is a trust without a beneficiary who can enforce the terms of the trust, but a trust with an express purpose behind its creation. Common examples of a purpose trust are a pet trust or a trust that preserves cemetery lots, gravesites, and monuments. In the past these were called  called honorary trusts. Another type of purpose trust that is authorized by statute in Michigan  is a charitable trust, but those trusts are subject to regulation and enforcement by the Attorney General’s Charitable Trust Division. That limited use of a purpose trust changed, though, with the adoption of the Uniform Trust Code (UTC), which has been adopted, albeit in various forms, by multiple states. Michigan adopted one section of the UTC, Section 408, that deals pretty much with historic honorary trusts. However, when Michigan adopted its version of the UTC, it did not adopt UTC Section 409 that seemingly authorizes longer term perpetual trusts. As such, it probably would not be possible to adopt a stewardship trust in Michigan today, but one could be established in Delaware.

Stewardship Trusts: As a result of Section 409 of the Uniform Trust Code,  purpose trusts have taken on an entirely different focus beyond just caring for pets or gravesites. A stewardship trust can preserve for an extended period of time a business held in trust, indirectly for the benefit of multiple stakeholders but who are not named as beneficiaries. Unlike a pet trust which normally has a statutory duration of 21 years, a stewardship trust can have something close to a perpetual existence if tied to the state’s Rule Against Perpetuities.  Accordingly, a stewardship trust is one that is formed to hold an operating business authorized under the Uniform Trust Code Section 409, as a noncharitable purpose trust.

Noncharitable Purpose Trust: A noncharitable purpose trust normally has three key differences from a conventional charitable purpose trust.

  • Noncharitable trusts cannot be created for an indefinite period like a charitable purpose trust can exist. Under some statutes the stewardship trust either can last a maximum of 21 years, or the state’s specific statute that is tied to the state’s maximum duration under the state’s Rule Against Perpetuities.
  • Under the Uniform Trust Code [MCL 700.7408} , a judge is given the authority to reduce the amount that is held in trust for its noncharitable purpose if the judge finds that the amount of assets are  in excess of what is needed to further the trust’s purpose; and
  • The Uniform Trust Code creates a ‘trust enforcer’ role to enforce the terms of the purpose trust against the trustee. The trust enforcer is either named by the settlor or by the court.

State Statutes: A handful of states have adopted their own version of UTC Section 409. Delaware does not limit the duration of a noncharitable purposes trust and it does not allow a presiding judge to reduce the amount held in that trust. In South Dakota, a judge may reduce the amount of assets held in the purpose trust, but that statute uses default rules and procedures that are designed to ease the administration of the purpose trust. South Dakota’s statute also provides for court direction if the purpose becomes impossible, inexpedient, or unlawful. It also provides that the trust enforcer acts as a fiduciary. Perhaps the state that has attracted the most recent attention with regard to stewardship trusts is Oregon, which ultimately adopted its statute modeled on Delaware’s stewardship trust statute. Oregon has garnered the attention because a large business is now operated as a stewardship trust. Oregon provides a good example of ‘why?’ a stewardship trust would be considered by some business owners.

Oregon Statute: Under the Oregon statute, adopted in 2019, a stewardship trust can be designed to hold title to a business that itself is organized as a corporation. The settlor of the trust names a trust enforcer to enforce the trust. A stewardship trust is a directed trust [like we have in Michigan] with a stewardship committee of a least three members who are granted all of the powers of a trustee. The stewardship committee has the right to vote the shares of the business and so is responsible for electing corporate directors. The statute provides clear reporting requirements between these 3 roles- trustee, stewardship committee, and enforcer, to ensure that each party has the information necessary to fulfill its duties. In Oregon, a stewardship trust will be exempt from Oregon’s 90-year Rule Against Perpetuities.

Oregon Experience: In 2019, an Oregon food distribution business called Organically Grown Company (OGC) sought out a new business structure that would allow it to lock-in its corporate mission as its founders transitioned into retirement. The goal was to separate equitable ownership from management in a way that would allow management to focus on the business’s purpose, long-term goals, and diverse groups of stakeholders. OGC ultimately decided to form its stewardship trust under Delaware’s statute because Oregon’s Rule Against Perpetuities limited the trust’s duration to 90 years, and the corporate  owners did not like the ability of the judge under Oregon’s version of  UTC 409 to reduce the amount of assets held in the stewardship trust, if a judge found that it was in excess of what the was necessary for the trust’s purpose. In short, the business owners felt that the existing Oregon law (before the passage of its statute) limited the control that they would have over the future of the trust that would hold their business, which is why it opted to create its stewardship trust under Delaware law. In the case of OGC, the stewardship committee consists of five representatives from five distinct groups of stakeholders: employees, farmers, customers, community allies, and investors. Each group of stakeholders elects one representative to the stewardship committee. In order to vote for a representative, a stakeholder must be actively involved in the business. This stewardship structure was used in lieu of the normal concern about the search for liquidity to purchase a retiring owner’s interest in the business, especially when the business transition coincides with a generational change in the business’ leadership. A business structured as a stewardship trust cannot finance its operations by selling voting shares since the goal is for the trust to have complete control over those shares. Its can, however, borrow money or sell preferred nonvoting shares. With OGC, the owners financed their transition through a loan from a social finance company and by selling preferred shares that pay a 5% annual dividend that are redeemable in 5 years.

Conclusion: A stewardship trust is definitely not for every business owner who is contemplating retirement and the sale of their business. But for some business owners who do not have readily apparent successors or heirs prepared to acquire the business, and who value keeping the business in existence long after they are gone, a stewardship trust might be something for them to consider. As noted earlier, such a trust could not be established in Michigan given its current version of the Uniform Trust Code, but such a trust could be established in Delaware, South Dakota, or Oregon which have all adopted stewardship trust  statutes that are designed to attract business to their states (something that Michigan does not seem to care much about these days).