Purpose Trusts: The Future of Business Succession Planning?
Part of Redwood Valuation’s 59th Heckerling Institute Coverage.
A new model of business succession planning is gaining traction—one that prioritizes long-term mission and alignment ahead of shareholder profit. Purpose trusts, though still relatively uncommon in the U.S., offer a compelling alternative to traditional ownership structures. The appeal lies in their ability to preserve a founder’s vision and secure their legacy beyond their leadership role.
The new structure started gaining notable attention after outdoor retailer Patagonia’s widely publicized transition to a purpose trust. The company’s founder, Yvon Chouinard, transferred ownership of the $3 billion enterprise to a purpose trust and nonprofit entity, ensuring that all future profits will be used to fight climate change, with the statement, “Earth is now our only shareholder.” This bold move has inspired a growing number of founders, particularly those focused on impact and sustainability, to consider whether a purpose trust might serve as the foundation for their own succession plans.
But while this structure presents an exciting opportunity for mission-driven oversight, it also introduces legal, tax, and valuation complexities that advisors must be prepared to navigate.
Understanding Purpose Trusts
Unlike traditional trusts, which are typically formed to benefit specific individuals or families, a purpose trust exists with the priority to advance a specific goal. This goal may be to ensure the company’s mission continuity or contribute to public benefit causes, such as in the case of Chouinard, whose primary vision for Patagonia is to fight climate change by investing all nonvoting stock into nonprofit Holdfast Collective. Instead of distributing profits to owners or shareholders, a company held by a purpose trust reinvests earnings into the business or its stated purpose.
This structure is especially appealing to founders who want to ensure their values remain embedded in the business, even after they step away. It can also offer a solution for owners who don’t intend to pass the business to family members or sell to external buyers but still want the company to thrive with professional oversight.
Although purpose trusts are more established in Europe, they are still relatively novel in the U.S. As a result, companies considering this path must carefully consider its fit with their long-term strategy and collaborate with a valuation expert to ensure it’s implemented effectively and defensibly.
Valuation Considerations: Adapting Valuation Approaches
The shift from shareholder-focused to purpose-driven ownership creates challenges for business valuation. Standard valuation methods—such as income-based approaches like DCF—may not neatly apply after the change. A business held by a purpose trust often lacks a conventional exit strategy. Without plans for a future exit or IPO, and with profits being reinvested rather than distributed, the question becomes: how do you determine a company’s worth when profit is no longer the sole driver?
Valuation professionals must take into account the unique characteristics of these structures. Determining fair market value may require a fresh look at how control, liquidity, and financial returns are evaluated. For example, many steward-owned companies find creative ways to return capital to early investors without shifting the company's long-term mission. Mechanisms like structured buyouts over time, installment redemptions, or low-interest loans can allow founders or funders to recover some of their investment, while keeping decision-making power in the hands of stewards. These approaches reduce pressure to sell the company or chase the highest bidder, which in turn affects how risk, control, and future cash flows are evaluated in a valuation.
From a transfer tax perspective, the creation of a noncharitable purpose trust may trigger gift tax implications. As noted by McDermott Will & Emery attorneys, “a gratuitous transfer to a noncharitable purpose trust is a gift.” Established planning tools such as grantor-retained annuity trusts, preferred partnerships, or interests eligible for discounts for lack of control and marketability may help mitigate tax effects. However, applying these techniques in the context of steward ownership requires careful alignment with the trust’s long-term mission and restrictions.
Ultimately, valuation in this context demands more than technical modeling. It requires a nuanced understanding of governance structures, trust mechanics, and stakeholder intent. Purpose doesn’t just change who holds value, it changes how value is defined in the first place. Any misalignment between the structure’s goals and the valuation methodology could lead to regulatory scrutiny or unintended tax consequences. That’s why a thoughtful, tailored approach is critical—a specialty of Redwood Valuation.
Is a Purpose Trust the Right Fit?
Although purpose trusts offer an innovative solution for business continuity, they’re not right for every business. For the model to succeed, the company must be self-sustaining without the financial incentives that come with traditional ownership. Management must also be carefully aligned to balance accountability to the mission with operational flexibility.
A purpose trust requires specialized guidance. Structuring the transfer of ownership, complying with IRS requirements, and ensuring the trust’s operations align with its stated purpose all demand careful planning.
As more businesses explore this model, valuation and estate planning professionals will play a central role, ensuring that transitions are not only visionary but also technically sound.
How Redwood Can Help
If you’re exploring a purpose trust as part of your succession strategy, Redwood Valuation can help you navigate the complexities with confidence. Our team has deep expertise in defensible valuations for complex ownership structures. We ensure that every valuation stands up to scrutiny while staying aligned with your long-term vision.