Yvon Chouinard, the founder of the Patagonia outdoor clothing company, and his family recently gave away their ownership to a special trust and nonprofit organization which will use the income, estimated at about $100 million a year, to combat climate change and protect undeveloped land around the world.
Chouinard, who is now 83 years old, is described as something of an accidental billionaire having founded Patagonia in 1973 after spending the sixties living out of his car and rock climbing in Yosemite Valley. He told The New York Times “I didn’t know what to do with the company because I didn’t ever want a company. I didn’t want to be a businessman.” Though the company is now valued at $3 billion, Chouinard is reported to still drive a “beat up” Subaru, wear “raggedy old clothes” (both of which I have in common with him), and to split his time between “modest” homes in Ventura, California, and Jackson, Wyoming.
The mechanism Chouinard and his wife, Malinda, and children, Fletcher and Claire, used to structure their company would not have been available a few years ago and was made possible by a change in trust law that has been adopted in many states. They donated 98% of the company to a new nonprofit called the Holdfast Collective and the remaining 2%, which constitute all the voting shares of stock, to the Patagonia Purpose Trust. This way, the trust will control the company, but 98% of the profits will go to the nonprofit.
By separating control of Patagonia in the purpose trust from the use of its profits in the nonprofit, the Chouinards can appoint people with different types of expertise to the different roles as well as creating separate structures for their appointment and succession.
Eliminating the Rule Against Perpetuities
The reason Chouinard and his family could create the Patagonia Purpose Trust now and not in the past is that many states have eliminated the rule against perpetuities. The bane of many first year law students, the rule against perpetuities limits the duration of trusts to “21 years plus a life in being.” The “life in being” is the lifetime of anyone mentioned in a trust. So, for instance, if you were to create a trust for the benefit of yourself, your spouse, your children and grandchildren, the trust would have to end within 21 years of the death of your last grandchild who was alive when you created the trust. (If the trust is revocable, the measuring life would be your longest lived grandchild alive at your death.)
While the specific length of any trust under this rule depends on how long the various parties live, it works out to about 100 years given current life expectancies. Of course, when the rule was developed through centuries of common law, life expectancies were much shorter.
In recent years, in conjunction with the creation of domestic asset protection trusts (DAPTs), many states have eliminated the rule against perpetuities permitting trusts to last indefinitely or for a very long time, such as 1,000 years. This is controversial for a number of reasons, including:
- So-called “dynasty” trusts are often designed to preserve wealth in families, contributing to persistent inequality.
- “Dead hand” control allows trust grantors to control what happens to their wealth and their families for too long.
- The future is unpredictable, so it doesn’t make sense to preserve any arrangement for too long.
- These trusts also provide both tax and creditor protection, meaning that beneficiaries don’t pay their fair share to the support of the society in which they live or use the funds to live up to their obligations whether created by contract or by court action if they caused an injury to someone else.
But others have argued that many other kinds of organizations, including corporations and nonprofit foundations, have no expiration date. So, why not trusts? Purpose trusts, such as the Patagonia Purchase Trust, were also made possible by another change in trust law, which permits them to be created to achieve particular objectives rather than being for the benefit of particular families and individuals. To some extent they started as pet trusts for the support of pets after the death of their owners and perpetual care trusts for cemeteries, which had not been permitted under the common law. Then they were expanded to permit other purposes. Oregon has lead the way in the authorization of business purpose trusts. It’s not clear whether the Patagonia Purpose Trust was created under Oregon law or that of another state.
My friend, Danny Fein, recently wrote an article for the ACTEC Law Journal, “A Defense of Perpetual Trusts,” arguing for elimination of the rule against perpetuities. For the reasons listed above, I’m not totally convinced. But it does seem to make sense to eliminate at least for purpose trusts.
While you probably don’t have billions to give away or own a company producing $100 milliion a year in profits, you still may want to create a purpose trust carry on your good deeds, whatever they may be. For me, I’ve never bought clothing at Patagonia because I’m cheap — see reference to beat up old Subaru and raggedy old clothing above — but now that I can see my purchases going to greater purpose, I may well become a Patagonia shopper.
To learn more about the Chouinard family plan, read:
A New York Times article here.
Yvon Chouinard’s explanation here.