Using “Purpose Trusts” for the Tax-Efficient Transfer of Cabins, Camps and Cottages

Whitney Gagnon Headshot
Whitney A. Gagnon
Associate, Trusts & Estates Department
Mary Susan Leahy
Of Counsel, Trusts & Estates Department
Published: Portsmouth Herald
November 9, 2021

New Hampshire is a leading jurisdiction for establishing trusts. Since 2004, the New Hampshire Legislature has continually modernized its trust laws to make trust administration more efficient, to provide flexibility based on changing laws and family and financial circumstances, and to improve the creditor protection afforded by trusts.

New Hampshire is one of few jurisdictions with legislation specifically authorizing “purpose trusts”. Purpose trusts are worthy of consideration when creating an entity to hold title to family properties for enjoyment of future generations.

A purpose trust, unlike a traditional trust, does not have ascertainable beneficiaries.  Rather, it is created for a specific purpose.  One permitted purpose can be to hold title to a family property for the enjoyment of a category of people.  For example, a purpose trust can be created to hold title to a property for the “descendants of X”. These descendants may be called “members” of the trust.

Under common law, a noncharitable trust without a beneficiary was unenforceable because there was no beneficiary who could to enforce the trustee’s obligations.  The New Hampshire Trust Code has addressed the lack of beneficiaries by providing that the trust may be enforced by someone designated in the trust agreement or by a court.

New Hampshire’s common law a trust could not be perpetual.  This rule used to provide that an interest in a trust must vest by no later than twenty-one years after the death of someone alive at the time the trust was created.  Under current New Hampshire law, the creator of a trust may create a “perpetual trust” or “dynasty trust” to benefit multiple future generations without a time-limit.

Purpose trusts are particularly useful to maintain a family’s cherished cabin, camp or cottage, or a larger family compound or lodge.  They can be useful for other purposes as well, such as managing a privately-held business, publishing manuscripts of a deceased author, or maintaining a collection of antiques.  The terms of the purpose trust can provide family members with specified decision-making ability while providing guidance and structure for furthering the management and success of the business or property and making sure that the business or property is not averted from the original owner’s vision.

A purpose trust is a tax-advantaged planning tool allowing multiple generations to enjoy the benefit of family assets while minimizing the tax burden of the trust assets and eliminating the need for future property appraisals and tax filings by descendants.

The creator of a purpose trust typically obtains a qualified appraisal and files a gift tax return when the property transfers to the purpose trust, applying some of her federal gift and estate tax exclusion amount to the transfer by filing a Federal gift tax return.  In this way, the trust creator transfers assets from her estate to the purpose trust at today’s value and removes the future appreciation of the assets from her taxable estate.  Further, since a purpose trust has no beneficiaries, there are no required appraisals or interests in the trust to include in the descendants’ estates at their own deaths. New Hampshire does not impose a separate New Hampshire state estate tax.

A purpose trust has its own tax identification number (TIN).  The trustee typically files an annual Federal fiduciary income tax return (1041) if its income exceeds $600 a year. Unlike a traditional trust, all of the trust income is taxed at the trust level and K-1’s are not sent to the descendants.  This makes tax filings easier for the tax preparer, the trustee and the descendants.

A purpose trust can provide a mechanism for the creation of an endowment for the property. New Hampshire would imposes an interest and dividends tax on earnings if the trust were endowed.

While the Federal income tax rate can be higher for assets taxed at the trust level than at the individual taxpayer level, the potential for paying at higher income tax rates should be compared with the increased operating efficiencies of a purpose trust.  Purpose trust agreements often are simpler to draft and shorter in length than traditional trust agreements. While they are not maintenance free for the trustee, record keeping can be far easier.  There are no beneficiaries to keep track of and provide K-1’s to, no complex record keeping for transfers of interests by beneficiaries and no need for appraisals and tax filings at the death of each descendant.

In summary, purpose trusts can be an attractive and tax-efficient option for transferring cherished cottages, cabins and camps for the enjoyment of future generations.