Working Paper: NBER ID: w18553
Authors: James R. Hines Jr.
Abstract: Federal estate taxes give very wealthy families incentives to transfer resources directly to distant generations in order to avoid taxes on successive rounds of transfers. Until recently such transfers were impeded by the rule against perpetuities, which prevented transfers to most potential not-yet-born beneficiaries. Many American states have recently repealed the rule against perpetuities, raising concerns that the combination of tax incentives and new legal rights encourages the devotion of vast wealth to perpetual trusts designed to benefit distant generations, avoid taxes, and maintain a degree of control over the financial affairs of descendants in perpetuity. \n \nThis paper analyzes the incentives created by federal transfer taxes, finding the tax benefits from establishing perpetual trusts to be quite modest, in representative cases ranging from 9-25 percent of just one component of the cost. Contrary to popular claims, tax benefits decline as investment returns rise. While U.S. states that have repealed the rule against perpetuities and adopted other policies to encourage trusts host substantial trust assets, evidence from tax returns suggests that perpetual trusts are unlikely to account for a significant portion of this business. Consequently, tax incentives may not be responsible for an important shift of assets into perpetual trusts.
Keywords: perpetual trusts; federal estate taxes; wealth transfer; generationskipping transfer tax
JEL Codes: H24; K11; K34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal transfer taxes (H24) | establishment of perpetual trusts (D14) |
| repeal of the rule against perpetuities (K36) | establishment of perpetual trusts (D14) |
| establishment of perpetual trusts (D14) | tax benefits (H20) |
| state population and per capita income (H79) | number of perpetual trusts (D64) |
| tax incentives (H20) | formation of perpetual trusts (D64) |