The Wall Street Journal has a 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 available only to subscribers, but the Journal’s story is already up on Westlaw (2005 WL-WSJ 59841238) for academics who have that subscription.
The study (which can be freely downloaded from SSRN) examines whether trust assets are moving into states that repealed the Rule v. Perpetuities and thus permit perpetual dynasty trusts.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finds that a lot of trust money has been flowing into South Dakota, Delaware, and Illinois (among others)–states that repealed the Rule v. Perpetuities and have no fiduciary income tax on trusts holding assets for out-of-state beneficiaries.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 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.
The study will be important to academics because it is the first major empirical paper on the competition among states for trust business. Academics know that there is a massive empirical literature in corporate law on state competition for corporate charters, but (until now) there has not been a similar literature in Trusts & Estates.
Sitkoff and Schanzenbach’s conclusion: If you build it, they will come.
Hot tip for any law review editors reading this blog: Check your mailboxes over the next few weeks; in its field this article will be a blockbuster.
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