Effectively Curbing the GST Exemption for Perpetual Trusts
Lawrence W. Waggoner
University of Michigan Law School
June 4, 2012
Tax Notes, Vol. 135, No. 10, June 2012
U of Michigan Law & Econ Research Paper No. 12-007
U of Michigan Public Law Working Paper No. 274
The Shelf Project
Current law allows a married couple to transfer up to $10.24 million into a trust that is exempt from the federal generation-skipping transfer tax. Congress did not impose a federal durational limit on trusts that qualify for the GST exemption, relying instead on state perpetuity laws that limited the life of the trust. The absence of a durational limit on the GST exemption provided an incentive for banks and the estate-planning bar to lobby their state legislatures to pass legislation allowing trusts to last forever or for several centuries. The lobbying efforts proved successful in many states. The result is that the wealthy are creating trusts in significant numbers that will be GST-exempt for much longer than Congress originally intended. As part of the Obama Administration’s Fiscal Year 2013 revenue proposals, the Treasury Department stated its position that the absence of a durational limit on the GST exemption is inconsistent with the purpose of the exemption and undermines the policy of the GST tax, but its proposed solution would leave many trusts and much wealth GST-exempt for much longer than Congress originally intended. For perpetual trusts created before enactment, the Treasury Proposal would allow them to continue to be unburdened by a durational limit. For perpetual trusts created after the effective date of enactment, the Treasury Proposal would still allow them to qualify for the GST exemption, but would have the exemption expire ninety years after the trust was created.
In this essay, the author advances a solution that would be far more effective than the Treasury Proposal. For new trusts, my proposal would deny the GST exemption ab initio, unless the trust must terminate within one of three perpetuity periods: (1) 21 years after the death of a life in being; (2) 90 years after creation; or (3) the death of the last living beneficiary who is no more than two generations younger than the settlor. For existing trusts, my proposal would allow a grace period during which the trusts can be modified to terminate within the allowed period, but absent modification, the trusts would lose their GST exemption at the end of the grace period. The solution the author advances is consistent with the original intent of the GST exemption, for it would truly end the perpetual-trust movement and its associated perpetual GST exemption for both new and existing trusts.
Number of Pages in PDF File: 7
Keywords: trusts, GST exemption, generation-skipping transfer tax, time limits, perpetual-trust, perpetuity laws
JEL Classification: K34, H24
Date posted: June 13, 2012 ; Last revised: July 9, 2012