Perpetuities, Taxes, and Asset Protection

This post is from Robert Sitkoff of Harvard Law School.

The Program on Corporate Governance has recently released a new discussion paper entitled Perpetuities, Taxes, and Asset Protection: An Empirical Assessment of the Jurisdictional Competition for Trust Funds, which I co-wrote with Max Schanzenbach. The paper abstract is as follows:

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.

Both comments and trackbacks are currently closed.


  1. Lee S. McCullough, III
    Posted Saturday, April 24, 2010 at 10:03 am | Permalink

    Utah has attempted to attract outside investment by extending the time period of their rule against perpetuities to 1,000 years and passing a law which allows asset protection for a self-settled trust. However, because Utah’s law for self-settled asset protection trusts includes more exceptions than similar acts in Alaska, Nevada, Delaware & other states which have recently passed laws allowing for self-settled asset protection trusts, Utah’s law is simply not able to compete. You might say that Utah put their toe in the water in comparison with other states that have jumped in with both feet. As a result, there is a consensus among Utah asset protection attorneys that no one is using the new law & it has produced zero economic benefit to the state.

  2. Lee S. McCullough, III
    Posted Saturday, April 24, 2010 at 10:34 am | Permalink

    The correct email address for the above post on Utah’s self-settled asset protection trusts is I would welcome any comments.