Congress Promotes Perpetual Trusts: Why?
Lawrence W. Waggoner
University of Michigan Law School
U of Michigan Law & Econ Research Paper No. 13-015
U of Michigan Public Law Research Paper No. 349
This posting updates the article titled Congress Promotes Perpetual Trusts: Why?. The article was originally posted on SSRN in September 2013. The updated version incorporates a discussion of two new developments — the unveiling of the long-awaited House Ways and Means Committee’s proposal for comprehensive tax reform and the issuance of the president’s proposed budget for 2015. Both of these new developments are disappointing because neither proposes curtailing or effectively curtailing perpetual trusts.
By unwittingly granting a tax exemption for perpetual trusts, Congress undermined state perpetuity law and promoted private trusts that can last and remain tax exempt for many centuries and maybe forever. As a direct result of Congress’s action, and then of lobbying by financial institutions and other interest groups to convince state legislatures to remove the obstacle of perpetuity law, the very wealthy can now create tax-exempt private trusts for generations upon generations of their descendants. And they are massively taking advantage of the opportunity.
Congress as an institution has known of its blunder for years, but has failed to remedy its mistake. On February 26, 2014, the House Ways and Means Committee unveiled its longawaited proposal for comprehensive tax reform, but the proposal does not address the tax exemption for perpetual trusts. The prospect for enactment of comprehensive tax reform in this Congress — the 113th — appears bleak in any event.
The author asks why Congress has not acted to correct its mistake and why it seems so uninterested in doing so. There is no federal interest in promoting perpetually tax-exempt trusts and, in fact, the federal interest cuts the other way. Tax revenues are lost by Congress’s action and subsequent inaction. A plausible explanation for Congress’s persistent indifference to the problem is that the revenue gain by correcting the oversight would be a long way off. Congress is not known for giving a high priority to problems of that sort. The longer Congress procrastinates, however, the amount of wealth that is safely sheltered in perpetually tax-exempt trusts — already estimated to be in the billions of dollars — continues to grow.
The Treasury Department has a proposal before Congress for remedying the situation, but the Treasury’s proposal, reiterated in the president’s proposed budget for 2015 issued on March 4, 2014, but ignored by the Ways and Means Committee’s comprehensive tax-reform proposal, is not nearly as effective as it could and should be. The author proposes a remedy that would be entirely effective and would be consistent with the original purpose of the tax law. Regrettably, the prospect that Congress will ever address the problem, much less address it effectively, grows dimmer with each passing year.
Number of Pages in PDF File: 40
Keywords: tax, tax exemption, Congress, perpetual trusts, private trusts, treasury department, perpetuity law
JEL Classification: H2, K34working papers series
Date posted: September 16, 2013 ; Last revised: May 21, 2014
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