Saturday, November 19, 2005
Max M. Schanzenbach (Northwestern) & Robert H. Sitkoff (Northwestern) have posted Perpetuities or Taxes: Explaining the Rise of the Perpetual Trust, 26 Cardozo L. Rev. ___ (forthcoming 2006), on SSRN. Here is the abstract:
By abolishing the Rule Against Perpetuities, 21 states have validated perpetual trusts. The prevailing view among scholars is that the 1986 generation skipping transfer (GST) tax prompted the movement to abolish the Rule by conferring a salient tax advantage on long-term trusts. However, an alternate view holds that demand for perpetual trusts stems from donors' preference for control independent of tax considerations. Proponents of both views have adduced supporting anecdotal evidence. Using state-level panel data on trust assets prior to the adoption of the GST tax, we examine whether a state's abolition of the Rule gave the state an advantage in the jurisdictional competition for trust funds. We find that, prior to the GST tax, a state's abolition of the Rule did not increase the state's trust business. By contrast, in a prior empirical study we found that, between the enactment of the GST tax and 2003, states that abolished the Rule experienced a substantial increase in trust business. Accordingly, we conclude that the enactment of the GST tax sparked the modern perpetual trust phenomenon. Understanding the impetus for the rise of the perpetual trust throws light on the debate over recent proposals to liberalize the law of trust termination and modification and to amend the GST tax. Our empirical assessment of competing explanations for the rise of the perpetual trust also contributes to the literature on the bequest motive.