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Abstract:
This Article presents the first empirical study of the domestic jurisdictional competition for trust funds. To allow donors to exploit a loophole in the federal estate tax, since 1986 a host of states have abolished the Rule Against Perpetuities as applied to interests in trust. To allow individuals to shield assets from creditors, since 1997 a handful of states have validated self-settled asset protection trusts. Based on reports to federal banking authorities, we find that, on average, through 2003 a state's abolition of the Rule increased its reported trust assets by $6 billion (a 20% increase) and increased its average trust account size by $200,000. By contrast, our examination of validating self-settled asset protection trusts yielded indeterminate results. Our perpetuities findings imply 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 observable increase in trust business after abolishing the Rule. Because this finding implies that abolishing the Rule does not directly increase a state's tax revenue, it bears on the study of jurisdictional competition. In spite of the lack of direct tax revenue from attracting trust business, the jurisdictional competition for trust funds is patently real and intense. Our findings also speak to unresolved issues of policy concerning state property law and federal tax law.

Abstract:
This Article presents the first empirical study of the domestic jurisdictional competition for trust funds. To allow donors to exploit a loophole in the federal estate tax, since 1986 a host of states have abolished the Rule Against Perpetuities as applied to interests in trust. To allow individuals to shield assets from creditors, since 1997 a handful of states have validated self-settled asset protection trusts. Based on reports to federal banking authorities, we find that, on average, through 2003 a state's abolition of the Rule increased its reported trust assets by $6 billion (a 20% increase) and increased its average trust account size by $200,000. By contrast, our assessment of validating self-settled asset protection trusts yielded indeterminate results. Our perpetuities findings imply 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 observable increase in trust business after abolishing the Rule. Because this finding implies that abolishing the Rule does not directly increase a state's tax revenue, it bears on the study of jurisdictional competition. In spite of the lack of direct tax revenue from attracting trust business, the jurisdictional competition for trust funds is patently real and intense. Our findings also speak to unresolved issues of policy concerning state property law and federal tax law.

Rule against perpetuities, jurisdictional competition, regulatory competition, trust funds, estate tax, generation skipping transfer tax, fiduciary income tax, self-settled trust, asset protection trust, wealth transfer taxes

Abstract:
This Article develops an agency costs theory of the law of private trusts, focusing chiefly on donative trusts. The agency costs approach offers fresh insights into recurring problems in trust law including, among others, modi-fication and termination, settlor standing, fiduciary litigation, trust-invest-ment law and the duty of impartiality, trustee removal, the role of so-called trust protectors, and spendthrift trusts. The normative claim is that the lawshould minimize the agency costs inherent in locating managerial authority with the trustee and the residual claim with the beneficiaries, but only to the extent that doing so is consistent with the ex ante instructions of the settlor. Accordingly, the use of the private trust triggers a temporal agency problem (whether the trustee will remain loyal to the settlor s original wishes) in addi-tion to the usual agency problem that arises when risk-bearing and manage-ment are separated (whether the trustee/manager will act in the best interests of the beneficiaries/residual claimants). The positive claim is that, at least with respect to traditional doctrines, the law conforms to the suggested nor-mative approach. This Article draws on the economics of the principal-agent problem and the theory of the firm, and it engages the ongoing debate about whether trust law is closer to property law or contract law. Although the analysis focuses on donative trusts, it should be amenable to extension infuture work to commercial and charitable trusts.

Abstract:
This Article develops an agency costs theory of the law of private trusts, focusing chiefly on donative trusts. The agency costs approach offers fresh insights into recurring problems in trust law including, among others, modification and termination, settlor standing, fiduciary litigation, trust-investment law and the duty of impartiality, trustee removal, the role of so-called trust protectors, and spendthrift trusts. The normative claim is that the law should minimize the agency costs inherent in locating managerial authority with the trustee and the residual claim with the beneficiaries, but only to the extent that doing so is consistent with the ex ante instructions of the settlor. Accordingly, the use of the private trust triggers a temporal agency problem (whether the trustee will remain loyal to the settlor's original wishes) in addition to the usual agency problem that arises when risk-bearing and management are separated (whether the trustee/manager will act in the best interests of the beneficiaries/residual claimants). The positive claim is that, at least with respect to traditional doctrines, the law conforms to the suggested normative approach. This Article draws on the economics of the principal-agent problem and the theory of the firm, and it engages the ongoing debate about whether trust law is closer to property law or contract law. Although the analysis focuses on donative trusts, it should be amenable to extension in future work to commercial and charitable trusts.

agency costs, trust law, settlor, trustee, beneficiary, donative transfer, fiduciaries, trust modification, trust termination, fiduciary litigation, trust-investment law, impartiality, trustee removal, trust protectors, spendthrift trusts

Abstract:
In both the publicly-traded corporation and the private donative trust a crucial task isto minimize the agency costs that arise from the separation of risk-bearing and manage-ment. But where the law of corporate governance evolved in the shadow of capital-market checks on agency costs, trust governance did not. Thus, even more than that of close corporations, the law and study of private trusts offers an illuminating counterfac-tual a control, as it were for a playful thought experiment about the importance of capital market efficiency to the law and study of public corporations. The animating idea for this essay is that many of the differences on the agency costs frontier between the public corporation and the private donative trust can be roughly attributed to their relative positions in modern capital markets and the related disparity in their residual claimants ease of exit. Among other things, this approach reveals a correlation between the trust law model and the views of corporate law scholars who doubt the ECMH and its implica-tions for corporate governance. The essay also discusses the use of market data for as-sessing breach and damages in corporate and trust litigation and for empirical evaluationof theoretical scholarly analysis in both fields. More generally, comparison of the gov-ernance of the public corporation and the private donative trust brings into view the im-portance of relative price efficiency for the modern approach to corporate governance.

Abstract:
In both the publicly-traded corporation and the private donative trust a crucial task is to minimize the agency costs that arise from the separation of risk-bearing and management. But where the law of corporate governance evolved in the shadow of capital-market checks on agency costs, trust governance did not. Thus, even more than that of close corporations, the law and study of private trusts offers an illuminating counterfactual - a control, as it were - for a playful thought experiment about the importance of capital market efficiency to the law and study of public corporations. The animating idea for this essay is that many of the differences on the agency costs frontier between the public corporation and the private donative trust can be roughly attributed to their relative positions in modern capital markets and the related disparity in their residual claimants' ease of exit. Among other things, this approach reveals a correlation between the trust law model and the views of corporate law scholars who doubt the ECMH and its implications for corporate governance. The essay also discusses the use of market data for assessing breach and damages in corporate and trust litigation and for empirical evaluation of theoretical scholarly analysis in both fields. More generally, comparison of the governance of the public corporation and the private donative trust brings into view the importance of relative price efficiency for the modern approach to corporate governance.

Abstract:
In both the publicly-traded corporation and the private donative trust a crucial task is to minimize the agency costs that arise from the separation of risk-bearing and management. But where the law of corporate governance evolved in the shadow of capital-market checks on agency costs, trust governance did not. Thus, even more than that of close corporations, the law and study of private trusts offers an illuminating counterfactual - a control, as it were - for a playful thought experiment about the importance of capital market efficiency to the law and study of public corporations. The animating idea for this essay is that many of the differences on the agency costs frontier between the public corporation and the private donative trust can be roughly attributed to their relative positions in modern capital markets and the related disparity in their residual claimants' ease of exit. Among other things, this approach reveals a correlation between the trust law model and the views of corporate law scholars who doubt the ECMH and its implications for corporate governance. The essay also discusses the use of market data for assessing breach and damages in corporate and trust litigation and for empirical evaluation of theoretical scholarly analysis in both fields. More generally, comparison of the governance of the public corporation and the private donative trust brings into view the importance of relative price efficiency for the modern approach to corporate governance.

public corporations, donative trusts, private trusts, agency costs, risk-bearing, management, corporate governance, capital markets, market efficiency, efficient market hypothesis, close corporations, fiduciary duty, portfolio theory, prudent investor, surcharge, total return

Abstract:
In July 2002 the trustees of the Milton Hershey School Trust announced a plan to diversify the Trust's investment portfolio by selling the Trust's controlling interest in the Hershey Company. The Company's stock jumped from $62.50 to $78.30 on news of the proposed sale. But the Pennsylvania Attorney General, who was then running for governor, opposed the sale on the ground that it would harm the local community. Shortly after the Attorney General obtained a preliminary injunction, the trustees abandoned the sale and the Company's stock dropped to $65.00. Using standard event study methodology, we find that the sale announcement was associated with a positive abnormal return of over 25% and that canceling the sale was followed by a negative abnormal return of nearly 12%. Our findings imply that instead of improving the welfare of the needy children who are the Trust's main beneficiaries, the Attorney General's intervention preserved charitable trust agency costs of roughly $850 million and foreclosed salutary portfolio diversification. Furthermore, blocking the sale destroyed roughly $2.7 billion in shareholder wealth, reducing aggregate social welfare by preserving a suboptimal ownership structure of the Company. Our analysis contributes to the literature of trust law by supplying the first empirical analysis of agency costs in the charitable trust form and by highlighting shortcomings in supervision of charities by the state attorneys general. We also contribute to the literature of corporate governance by measuring the change in the Company's market value when the Trust exposed the Company to the market for corporate control.

agency costs, charitable trust, corporate control, controlling shareholder, takeover, attorney general, event study, randomization inference, hershey, hershey trust, hershey company, nonprofit, charity governance

Abstract:
This is a transcript of a roundtable discussion between Robert Pritzker of The Marmon Group, Inc., Vice-Chancellor Jack Jacobs of the Delaware Court of Chancery, and Law Professors William Carney, Richard Painter, and Robert Sitkoff, with Professor Carney serving as moderator. The general topic was corporate governance. Among other things the participants discussed the implications of information provided by Mr. Pritzker regarding Smith v. Van Gorkom. Mr. Pritzker stated that the $55 price and the one-week deadline were established by Jerry Van Gorkom, not the Pritzkers. Mr. Pritzker also described the terms and the motivations for the Pritzkers' contribution to the settlement. Finally, in addition to analysis of the Van Gorkom decision, the panel also discussed public and private boards of directors, the Caremark decision, and corporate charitable and political contributions. The roundtable was held under the auspices of the Theory Informs Business Practices Symposium at the Chicago-Kent College of Law on April 6, 2001.

Van Gorkom, Trans Union, Pritzker, Board of Directors, Caremark, Corporate Crime, Corporate Charity, Corporate Political Speech, Business Judgment Rule, Mergers, Takeovers

Abstract:
This article explores the policy bases for, and the political economy of, the law's long-standing discrimination against corporate political speech. This Article also explores the relevance of state law regulation of corporate political speech to the competition between the states for corporate charters. In the process, implications for the current political debate over soft money and the current academic debates over enacting an optional federal corporate takeover law regime and creating a securities law regulatory competition are noted. The underlying aim of this Article is to bring to bear on the relevant policy debates a shift in focus from the shareholder/manager agency relationship to the agency relationship between lawmakers and society. The Article draws on the contractarian view of the firm, the economic theory of regulation, and the study of public choice.

Corporate Political Speech, Political Extortion, Economic Theory of Regulation, Tillman Act, Delaware, Corporate Governance, Regulatory Competition, Managers, Shareholders, Takeovers, Agency Costs

Abstract:
This paper investigates the effect of changes in state prudent trust investment laws on asset allocation in noncommercial trusts. The old prudent-man rule favored "safe" investments and disfavored "speculation" in stock. The new prudent-investor rule directs trustees to craft an investment portfolio that fits the risk tolerance of the beneficiaries and the purpose of the trust. Using state- and institution-level panel data from 1986-97, we find that after adoption of the new prudent-investor rule, institutional trustees held about 1.5-4.5 percentage points more stock at the expense of "safe" investments. Our findings explain roughly 10-30 percent of the overall increase in stock holdings in the period studied. The rest of the increase appears to be attributable to stock market appreciation. We conclude that, even though trust fiduciary laws are nominally default rules, institutional trustees are nonetheless sensitive to changes in those rules.

prudence, trust investment law, modern portfolio theory, investment, prudent investor rule, prudent man rule, agency costs, fiduciary

Abstract:
Trust has long been a competitor of corporation as a form of business organization. Though corporation today dominates trust for operating enterprises, trust dominates corporation in certain specialized niches. The market value of these niches measures in the trillions of dollars. Yet the modern business trust has only recently begun to be subjected to scholarly inquiry. Accordingly, this essay outlines a research agenda for the study of the trust - in particular, the modern statutory business trust - as a form of business organization. Put into the parlance of the conference on which this symposium issue is based, this essay is a call for research on the business trust as "uncorporation."

trust, business trust, business organization, corporation, mutual fund, securitization, structured finance, statutory business trust

Abstract:
This essay explores the policy bases for, and the political economy of, the law's long-standing regulation of corporate political speech. The essay has three parts. First, it contends that the conventional justifications for regulating corporate interventions in politics - that corporate donations unnaturally skew the political discourse (bad politics) and that corporate political donations harm shareholders (agency costs) - assume irrational investors and substantial capital market inefficiency. Drawing on public choice theory, the essay also explores the aim of retarding rent-seeking as an alternative justification for regulating corporate interventions in politics. Second, the essay reexamines the history of the regulation of corporate political speech and suggests a political economy analysis whereby corporations favored limitations on corporate donations in order to obtain protection from rent extraction by politicians. Finally, the essay explores the implications of this analysis for the modern regulation of corporate political donations.

Corporate Political Speech, Political Extortion, Economic Theory of Regulation, Tillman Act, Agency Costs, Rent Seeking, Public Choice, Rent Extraction, Soft Money, Hard Money, PACs, Campaign Finance

Abstract:
This chapter provides an accessible overview of our previous work on the impact of the abolition of the Rule Against Perpetuities (RAP) on trust fund situs. The implementation of the Generation Skipping Transfer (GST) Tax by the Tax Reform Act of 1986 sparked a movement to repeal the RAP. Since 1986, nearly half the states have abolished or effectively abolished the RAP as applied to interests in trust. Prior to 1986, only three states had abolished the RAP. We find no evidence that abolishing the RAP prior to the 1986 GST tax attracted trust business. By contrast, between 1986 and 2003, abolishing states reported an average increase in trust assets of $6 billion (a 20 percent increase). In addition, average account size in abolishing states increased by $200,000, implying that abolishing the rule attracted relatively larger trusts. Our findings imply that roughly $100 billion in trust funds have moved to take advantage of the abolition of the RAP. Further, we can trace these results to the subset of abolishing states that did not levy a tax on income accumulated in trusts attracted from out of state. This finding, which implies that abolishing the RAP does not directly increase state tax revenue, bears on the scholarly debate over the mechanisms of jurisdictional competition. Our analysis also controls for whether a state validated the so-called self-settled asset protection trust (APT). We did not find consistent evidence that validating APTs increases a state's reported trust business, but in the period studied few states had validated APTs, so we draw no firm conclusions.

We conclude that the jurisdictional competition for trust funds is real and intense, with the primary margin of competition being the rules that bear on trust duration, and that the enactment of the GST tax sparked the rise of the perpetual trust. In future work using more refined data, we intend to revisit the jurisdictional competition for trust funds and to expand our inquiry to include directed trustee statutes and the recent reforms to trust-investment laws.

rule against perpetuities, jurisdictional competition, regulatory competition, trust funds, estate tax, generation skipping transfer tax, fiduciary income tax, self-settled trust, asset protection trust, wealth transfer taxes, bequest motive, trust modification, trust termination

Abstract:
By abolishing the Rule Against Perpetuities, 21 states have now validated perpetual trusts. The prevailing view among scholars is that enactment of the generation skipping transfer (GST) tax in 1986 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 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 prompted the rise of the perpetual trust. These findings bear on the debate over proposals to liberalize the law of trust termination and modification and to amend the GST tax. Our findings also contribute to the literature on the bequest motive.

rule against perpetuities, jurisdictional competition, regulatory competition, trust funds, estate tax, generation skipping transfer tax, fiduciary income tax, wealth transfer taxes, bequest motive, trust modification, trust termination

Abstract:
For 200 years the rule against accumulations of income, which limits the time during which a settlor may direct the trustee to accumulate and retain income in trust, has lurked in the shadow of its older and more distinguished cousin, the Rule Against Perpetuities. With the erosion of the Rule Against Perpetuities, however, the rule against accumulations may have newfound relevance. Perpetual trusts are more likely than ordinary trusts to involve accumulations of income, and such trusts are designed to endure beyond the permissible common law accumulations period. This essay examines the relevance of the rule against accumulations for the rise of the perpetual trust. The essay also assesses the contemporary policy soundness of the accumulations rule.

Accumulations, trust income, perpetual trust, perpetuities, rule against perpetuities, rule against accumulations, Thellusson, discretionary trust

Abstract:
Trust has long been a competitor of corporation as a form of business organization. Though corporation today dominates trust for operating enterprises, trust dominates corporation in certain specialized niches. The market value of these niches measures in the trillions of dollars. Yet the modern business trust has only recently begun to be subjected to scholarly inquiry. Accordingly, this essay outlines a research agenda for the study of the trust in particular, the modern statutory business trust⬠as a form of business organization. Put into the parlance of the conference on which this symposium issue is based, this essay is a call for re-search on the business trust as â¬Suncorporation.â¬?

Abstract:
By abolishing the Rule Against Perpetuities, twenty-one states have validated perpetual trusts. The prevailing view among scholars is that enactment of the generation skipping transfer (GST) tax in 1986 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 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 theenactment of the GST tax prompted the rise of the perpetual trust. These findings bear on the debate over proposals to liberalize the law of trust termination and modification and to amend the GST tax. Our findings also contribute to the literature on the bequest motive.