TY  - JOUR
AU  - Hines, James R, Jr.
TI  - How Important Are Perpetual Tax Savings?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 18553
PY  - 2012
Y2  - November 2012
DO  - 10.3386/w18553
UR  - http://www.nber.org/papers/w18553
L1  - http://www.nber.org/papers/w18553.pdf
N1  - Author contact info:
James R. Hines
Department of Economics
University of Michigan
343 Lorch Hall
611 Tappan Street
Ann Arbor, MI  48109-1220
Tel: 734/764-2320
Fax: 734/764-2769
E-Mail: jrhines@umich.edu
M1  - published as James R. Hines Jr.. "How Important Are Perpetual Tax Savings?," in Jeffrey R. Brown, editor, "Tax Policy and the Economy, Volume 27" University of Chicago Press (2013)

M3  - presented at "Tax Policy and the Economy", October 6, 2011
AB  - 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  Many American states have recently repealed the rule against perpetuities, raising concerns that the combination of tax incentives and new legal rights encourages the devotion of vast wealth to perpetual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  While U.S. states that have repealed the rule against perpetuities and adopted other policies to encourage trusts host substantial trust assets, evidence from tax returns suggests that perpetual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.
ER  -