How Important are Perpetual Tax Savings?

34 Pages Posted: 22 Nov 2012

Date Written: November 2012

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 Many American states have recently repealed the rule against perpetuities, raising concerns that the combination of tax incentives and new legal rights encourages the devotion of vast wealth to perpetual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.This 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 While U.S. states that have repealed the rule against perpetuities and adopted other policies to encourage trusts host substantial trust assets, evidence from tax returns suggests that perpetual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.

Suggested Citation

Hines, James Rodger, How Important are Perpetual Tax Savings? (November 2012). NBER Working Paper No. w18553. Available at SSRN: https://ssrn.com/abstract=2179391

James Rodger Hines (Contact Author)

University of Michigan ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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