July 19, 2023 – The State Bar of Wisconsin’s Board of Governors (Board) recently approved the creation of a Special Purpose Trust, a positive step initiated to protect the financial security of the organization. The Board’s action now allows the State Bar to move up to $5 million of reserves into a Special Purpose Trust.
Many of our members have had questions and comments about the wisdom of creating a Special Purpose Trust. I want to take this opportunity to address and answer some of those questions in the hope that you will better understand why creating a Special Purpose Trust is a positive step to protect the future financial security of the State Bar as a member organization.
I am writing as the Immediate Past President of the State Bar, but I was still serving as President when the Board of Governors voted to establish the Trust.
What is a Special Purpose Trust?
Wis. Stat. section 704.0409 permits the creation of a Special Purpose Trust that does not have a specific beneficiary. Instead, the beneficiary is a purpose for which the Trust is created. In this case, the purposes of the Trust exactly mirror the purposes of the State Bar of Wisconsin, as stated in Wisconsin Supreme Court Rule (SCR) 10.02(2), which states that the purposes of the association are to:
aid the courts in carrying on and improving the administration of justice;
foster and maintain on the part of those engaged in the practice of law high ideals of integrity, learning, competence and public service and high standards of conduct;
safeguard the proper professional interests of the members of the bar;
encourage the formation and activities of local bar associations;
conduct a program of continuing legal education;
assist or support legal education programs at the preadmission level;
provide a forum for the discussion of subjects pertaining to the practice of law, the science of jurisprudence and law reform and the relations of the bar to the public and to publish information relating thereto;
carry on a continuing program of legal research in the technical fields of substantive law, practice and procedure and make reports and recommendations thereon within legally permissible limits;
promote the innovation, development and improvement of means to deliver legal services to the people of Wisconsin.
The goal of these purposes is that the “public responsibility of the legal profession may be more effectively discharged.” The purposes of the Special Purpose Trust are the same as the purposes under 10.02(2), and any distribution from the Trust will only be made for these purposes.
Why would the Board of Governors wish to put some of its reserve assets into a Special Purpose Trust?
The answer to this question starts at the formation of the State Bar as a mandatory organization. The State Bar is a nonprofit “association” created by the Wisconsin Supreme Court to serve the membership and the public. However, it is an unusual entity. It is not a state agency. It is not a 501(c)(3) organization and the rules of a typical nonprofit organization do not apply to the State Bar. It also has no corporate status.
Because of its unique status, State Bar leaders over the years have recognized an inherent uncertainty on what would happen to the State Bar should its mandatory status ever change, and what that means for its continued service to members.
Over the course of its 67-year history, the State Bar has defended its mandatory status in numerous lawsuits. It has also defended challenges on how the State Bar engages in what is known as the Keller process. Under Keller v. State Bar of California, 496 U.S. 1 (1990), and subsequent rulings, mandatory bar associations may use compulsory dues to fund only those activities “necessarily or reasonably related to the purposes of regulating the legal profession or improving the quality of legal services.” The State Bar must refund, to objecting members, any dues used to fund activities not related to those activities.
While the State Bar of Wisconsin has successfully defended its mandatory status and its Keller process over many decades, these types of challenges create uncertainty for the State Bar’s future, as well as its financial security. Neither the Wisconsin Supreme Court Rules governing the State Bar nor the State Bar bylaws have a process for determining what happens to the State Bar – or its assets – should it cease to exist as a mandatory organization.
Because of the State Bar’s unique status, and the absence of dissolution provisions, this uncertainty was a primary driver among many State Bar leaders who began to discuss a “Plan B.” The creation of the Special Purpose Trust is a Plan B.
In the event the State Bar’s mandatory status changes, a successor state bar organization whose purposes align with the purposes outlined in SCR 10.02(2) would potentially have access to funds within the Special Purpose Trust, subject to the approval of the Trust’s Trustees, to continue operations. A grant process will be used to determine how Trust funds, if any, should be used in accordance with the purposes under SCR 10.02(2). Because the State Bar is not a beneficiary of the Trust, the Trust funds are subject to grant requests from the State Bar and other entities, so long as the request aligns with the purposes of the Trust.
The future uncertainty of the State Bar’s status was not the only purpose in creating the Trust, but it was certainly a primary driver to potentially mitigate future financial risk. Leadership has learned of other challenges to state bar organizations in other states that have attempted to access those state bars’ assets. A Special Purpose Trust protects assets from those and other threats.
A Special Purpose Trust was not the only vehicle that leadership explored, but because of the State Bar’s unique legal status, other vehicles posed challenges. For example, leadership explored whether the State Bar could put excess funds into a community foundation for management, but since the State Bar is not a 501(c)(3) charitable organization, the State Bar is not eligible to put funds into such a community foundation.
What assets will go into the Trust?
The State Bar’s annual budget of about $13 million is funded by two sources: 1) 45% of the annual budget is funded by mandatory dues; 2) 55% of the budget is funded by programs and products developed by the State Bar, including CLE programs, PINNACLE Books, BooksUnbound, and other non-dues activities.
Mandatory dues dollars are fully used every year to fund core State Bar programs, such as Practice 411, the Ethics Program, WisLAP, Wisconsin Lawyer, and other core functions, personnel, and infrastructure. However, over a period of more than two decades, the State Bar has accumulated reserve funds – funds generated from revenue streams outside of dues – as a result of wise fiscal management, investment returns, programs and products. If dues were the State Bar’s only revenue source, the organization would not have current reserves.
The conventional wisdom on the amount of reserves that an entity such as the State Bar should have is between 3 and 12 months of operational expenses, to account for uncertain times or capital outlays. Up to $5 million – between 4 and 5 months of operational expenses – will go into the Special Purpose Trust, which represents roughly 80% of the State Bar’s current reserves.
In addition, the State Bar owns assets that will not go into the Special Purpose Trust, such as its unencumbered office building, short-term reserves, intellectual property, and operating reserves. Putting a portion of reserves into the Special Purpose Trust will not jeopardize the current financial security of the State Bar.
Who controls the Trust?
The Special Purpose Trust will be controlled by Trustees and Trust Protectors who have a fiduciary responsibility to carry out the proposes of the Trust. The State Bar will no longer control assets within the Trust because the Special Purpose Trust is irrevocable. This is one of the requirements for such a Trust to function as intended. If the Trust is revocable, then the protection of the funds is not accomplished.
Trustees will be former elected State Bar officers and the State Bar’s Executive Director. Trust Protectors, under Wis. Stat. section 701.0818, will also be selected. The job of a Trust Protector is to ensure that the Trust is used for the intended purposes. Trust Protectors will also be former elected State Bar leaders. Once the Special Purpose Trust document is finalized and executed, it will be available on the WisBar website.
Why were State Bar members not part of the initial discussions about the Special Purpose Trust?
As I noted, State Bar leaders began discussing methods to protect assets over the last several years. No formal working group was formed. However, over the last year-and-a-half, discussions about the concept of a Trust became more intentional. It became clear among State Bar leaders that they had a fiduciary duty to explore the concept of a Trust to protect the State Bar’s financial security.
However, the exploration of a trust concept was a legal matter, requiring legal counsel. The exploration of the Special Purpose Trust occurred in closed session in four consecutive Board of Governor meetings to preserve attorney-client privilege while discussing legal memoranda and advice provided by legal counsel. Board members were eventually authorized to discuss the Trust with their constituents ahead of the June 14, 2023, meeting, and an article about the Trust was included in the May 17 issue of Inside Track.
Many State Bar leaders felt the decision to create a Special Purpose Trust was one that the State Bar’s Board of Governors were elected to make, by you, the constituents. Board members received information about the Trust concept for more than a year, to help them make an informed decision. Numerous members of the Board scrutinized and questioned the uncertainty and risk associated with creating the Special Purpose Trust, but ultimately a majority felt this was a risk worth taking to protect the future financial security of the State Bar. There were dissenters, but the Board took action on this issue by a majority vote.
Some individuals have publicly commented regarding the wisdom of creating a Special Purpose Trust. As elected leaders, we know that not all of our decisions will be easy ones, or popular.
But as an elected body, it is your elected representative’s obligation to digest and understand all the information presented to them and make an informed decision one way or the other. Your representative may not always make a decision you agree with, but I assure you they made a fully informed decision as it relates to the Trust and the financial security of the State Bar.
Other questions raised issues with a transfer to the Trust. The State Bar does not have outstanding creditors (other than usual bills) or judgments against it. Without going into the legal advice received by the Board, we are confident that there are no issues with putting the funds into a Trust where we have no outstanding lawsuits or claims against the State Bar.
In addition, as noted, funds within the Trust can only be used for activities that support the purposes outlined in SCR 10.02(2). They cannot be used for any other purpose.
Why were some meetings held in closed session concerning the Special Purpose Trust?
As mentioned, many of the meetings to discuss the Trust were held in closed session because the Board received legal advice from our attorneys on the establishment, funding, and other issues related to the Trust. Board members asked important legal questions that our attorneys answered as part of these attorney-client meetings.
While we did not disseminate the legal advice to members because it would violate the attorney-client privilege, Board members were well-educated and had questions answered throughout the fiscal year (2022-23), and at one meeting last fiscal year (2021-22). Board members more recently could discuss the reasoning behind the Trust and the pros and cons of the Trust with members. Leadership was available to answer questions directly, which we did.
As elected members of the State Bar’s Board of Governors, and given the authorization to carry out our fiduciary duty to the organization via SCR 10, we must balance the best interests of the State Bar as an organization with the best interests of our members.
Members of the Board must make hard decisions, especially as it relates to the State Bar’s finances. It is with great appreciation that I acknowledge all the time and effort that everyone has put into making this tough decision. We made the decision after many months of education and extensive discussion on the issue.
I am confident it was the right decision. I hope you, as a member of the State Bar and the legal profession, can respect that this governing body of elected (and volunteer) representatives had the bests interests of the State Bar’s financial future in mind.
If you have questions after reviewing this article, please contact me (Margaret Hickey), the State Bar’s immediate past president, or current State Bar President Dean R. Dietrich.