Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes

Abstract

abstract. This Article presents the first empirical study of the domestic jurisdictional competition for trust funds. To allow donors to exploit a loophole in the federal estate tax, since 1986 a host of states have abolished the Rule Against Perpetuities as applied to interests in trust. To allow individuals to shield assets from creditors, since 1997 a handful of states have validated self-settled asset protection trusts. Based on reports to federal banking authorities, we find that, on average, through 2003 a state's abolition of the Rule increased its reported trust assets by $6 billion (a 20% increase) and increased its average trust account size by $200,000. By contrast, our examination of validating self-settled asset protection trusts yielded indeterminate results. Our perpetuities findings imply that roughly $100 billion in trust funds have moved to take advantage of the abolition of the Rule. Interestingly, states that levied an income tax on trust funds attracted from out of state experienced no observable increase in trust business after abolishing the Rule. Because this finding implies that abolishing the Rule does not directly increase a state's tax revenue, it bears on the study of jurisdictional competition. In spite of the lack of direct tax revenue from attracting trust business, the jurisdictional competition for trust funds is patently real and intense. Our findings also speak to unresolved issues of policy concerning state property law and federal tax law.

Did Reform of Prudent Trust Investment Laws Change Trust Portfolio Allocation?

“…652-54). Third, as a result of the jurisdictional competition for trust funds, state laws concerning the rule against perpetuities and self-settled asset protection trusts became significantly differentiated beginning in 1997 (see Sitkoff and Schanzenbach 2005). 30 Although these changes do not bear directly on trust investment law, they nonetheless have the potential to affect trust investment practice.…”

The Prudent Investor Rule and Market Risk: An Empirical Analysis

“…Beginning in the late 1990s, state trust laws became significantly differentiated on a handful of margins in response to lobbying by local bankers and lawyers, who sought to attract out-of-state trust business. In Sitkoff and Schanzenbach (2005), we found that certain of these reforms were associated with substantial increases in reported trust assets and average account size. 20 Accordingly, in some specifications we undertake national-level analysis, cut the data in 1997, 21 or control directly for these reforms (as well as principal-and-income reform).…”

“…§ 1811), was enacted in 1994 but the reform at issue did not take effect until 1997. 20 The principal effect was in states that authorized perpetual trusts and did not levy a fiduciary income tax (Sitkoff and Schanzenbach [2005], pp. 410-11).…”

“…410-11). 21 With the single exception of perpetual trusts in Delaware, all the jurisdictional competition reforms were enacted in 1997 or later (see Sitkoff and Schanzenbach [2005], pp. 430-33, tbl.…”

“…"Trust Law Controls" are a dummy for the abolition of the rule against perpetuities; a dummy for the recognition of asset protection trusts; and a dummy for adoption of principal-and-income reform. In accordance with Sitkoff and Schanzenbach (2005), the dummies for perpetuities and asset protection are turned on only if the state also does not tax out-of-state trusts on the basis of administration by an in-state trustee. No trust assets are reported in three state-year observations.…”