Magical Thinking and Trusts
50 Pages Posted: 23 Jul 2019 Last revised: 6 Dec 2019
Date Written: July 20, 2019
At a time of monumental economic inequality in the United States, wealthy individuals and their tax-motivated behavior have come under significant scrutiny from all corners. In 2019, the Supreme Court issued its first major ruling in over sixty years on the state income taxation of trusts. In North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, the Court declined to close what some critics consider to be a major loophole that benefits the trusts that wealthy individuals create for family members. This Article makes two principal claims — one interpretative and the other normative. The Article explains why the Court’s decision in Kaestner Trust is correct as a matter of law. Just as trusts themselves are a type of magical thinking — legal fictions made real by law — so, too, is the hope that the judicial branch can play an active role in limiting the use of trusts by the wealthy. Because judges cannot disregard centuries of trust jurisprudence, critics of family trusts have directed their attention mostly to the tax law. This Article suggests that reformation of the substantive law of trusts might help achieve reform, as well.
Through the prism of a reimagined legal landscape for trusts — by engaging in a different exercise in magical thinking — one can differentiate those aspects of family trusts that serve salutary legal or social purposes from those that serve primarily to preserve and protect wealth. This analysis has important implications for the larger cultural conversation about trusts. Examining how trusts operate and considering what limitations, if any, a just society might impose on them opens the way for identifying allies in the effort to narrow the wealth gap. Reducing wealth inequality is crucial so that all people will have some means of pursuing their personal ideals of social, political and economic fulfillment.
Keywords: trusts, wealth inequality, wealth gap, perpetuities, decanting, asset protection, democracy
JEL Classification: K1, K11, K34
Suggested Citation: Suggested Citation