Posted by Jim Lindgren:
New Study on Dynasty Trusts and the Abolition of the Rule v. Perpetuities.--
The Wall Street Journal has a [1]story today on a pathbreaking new
study just completed by two of my brilliant young Northwestern
colleagues, Rob Sitkoff and Max Schanzenbach. Unfortunately, the
Journal's article is [2]available only to subscribers, but the
Journal's story is already up on [3]Westlaw (2005 WL-WSJ 59841238) for
academics who have that subscription.
The [4]study (which can be downloaded for [5]free from SSRN) examines
whether trust assets are moving into states that repealed the Rule v.
Perpetuities and thus permit perpetual dynasty trusts. Rachel
Silverman in the Journal explains:
Until recently, trusts could effectively last only about 90 to 120
years, under a law called the Rule Against Perpetuities. Since the
mid-1990s, a growing number of states moved to relax the term
limits. Now, at least 18 states and jurisdictions -- including
Delaware, Wisconsin, New Jersey, Illinois, Virginia and the
District of Columbia -- allow trusts to last forever. Several
states that impose term limits allow much longer durations. Wyoming
and Utah, for instance, permit trusts to last 1,000 years, while
Florida lets them carry on for 360 years.
To set up a dynasty trust, it isn't necessary for families to live
in a state that permits them. Only a trustee has to be located
there -- and many trust companies have operations in Delaware,
Florida or other states that welcome long-term trusts. Moreover,
some of those states, such as Alaska, have other trust-friendly
benefits, like no state income taxes on trusts and strong
asset-protection laws.
The study found that simply changing a state's perpetuities laws
wasn't enough to attract trust assets. Whether a state levied
income tax on trust funds mattered, too. If a state abolished its
rule against perpetuities, but still taxed trust funds attracted
from out of state, the researchers found "no observable increase"
on a state's reported trust assets. By contrast, if a state allowed
dynasty trusts but also didn't tax trust funds created by
nonresidents, the state's reported trust assets increased by
roughly $13 billion on average during the time period studied.
The study finds that a lot of trust money has been flowing into South
Dakota, Delaware, and Illinois, states that repealed the Rule v.
Perpetuities and have no fiduciary income tax on trusts holding assets
for out-of-state beneficiaries.
Here is the [6]abstract to the scholarly paper:
Jurisdictional Competition for Trust Funds: An Empirical Analysis
of Perpetuities and Taxes This paper presents the first empirical
study of the jurisdictional competition for trust funds. In order
to open a loophole in the federal estate tax, a rash of states have
abolished the Rule against Perpetuities. Based on reports to
federal banking authorities, we find that through 2003 a state's
abolition of the Rule increased its trust assets by $6 billion (a
20% increase on average) and increased its average trust account
size by $200,000. These estimates indicate that roughly $100
billion in trust funds have moved to take advantage of the
abolition of the Rule. Interestingly, states that levied an income
tax on trust funds attracted from out of state experienced no
increase in trust business from abolishing the Rule. This is a
striking finding for the theory of jurisdictional competition,
because it implies that abolishing the Rule does not directly
increase a state's tax revenue. These results also have relevance
for theories relating to altruism and the bequest motive. The main
tax benefits of establishing a perpetual trust accrue not to the
donor or anyone she knows, but to beneficiaries whom the donor has
never met - the unborn.
One reason that the study is important to academics is that I believe
it is the first major empirical paper on state competition for trust
business. Academics know that there is a massive empirical literature
in corporate law on state competition for corporate charters, but
there has not yet been a similar literature in Trusts & Estates.
Their conclusion: If you build it, they will come.
References
1.
http://online.wsj.com/article/0,,SB110851293877655929,00.html?mod=home%5Fwhats%5Fnews%5Fus
2.
http://online.wsj.com/article/0,,SB110851293877655929,00.html?mod=home%5Fwhats%5Fnews%5Fus
3. http://www.westlaw.com/
4. http://ssrn.com/abstract=666481
5. http://ssrn.com/abstract=666481
6. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=666481
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