Monday, May 12, 2008

Repealing the rule against perpetuities works!

After the enactment of the generation-skipping transfer tax, some wealthy families became much more interested in creating perpetual private trusts to avoid future transfer taxes. The obstacle to such a strategy is the inscrutable rule against perpetuties.

No problemo, said roughly half of the states, who proceeded to either repeal the rule for in-state trusts or extend it for such a long period as to be "perpetual enough." Some states also adopted a "wait and see" rule, that is, the rule against perpetuities could not be invoked to invalidate a trust because of the mere possibility of breaking the rule, an actual violation would be required.

Why would the states toss out the venerable rule against perpetuities? Because it would get them a leg up in attracting new trust business. Could that strategy really work?

Yes, it did.

Here's the documentation: SSRN-Perpetuities, Taxes, and Asset Protection: An Empirical Assessment of the Jurisdictional Competition for Trust Funds by Robert Sitkoff, Max Schanzenbach. The law professors discovered that abolishing states enjoyed a 20% increase in trust new business ($6 billion per year) and their average trust size increased by $200,000. They estimate that $100 billion worth of trust funds have been relocated to take advantage of the abolition of the rule against perpetuities.

1 comment:

JLM said...

Wow,the "dead hand" is alive and well at last!