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How Important Are Perpetual Tax Savings?

In: Tax Policy and the Economy, Volume 27

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  • James R. Hines Jr.

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 Many American states have recently repealed the rule against perpetuities, raising concerns that the combination of tax incentives and new legal rights encourages the devotion of vast wealth to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 While U.S. states that have repealed the rule against perpetuities and adopted other policies to encourage trusts host substantial trust assets, evidence from tax returns suggests that perpetual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

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This chapter was published in:

  • Jeffrey R. Brown, 2013. "Tax Policy and the Economy, Volume 27," NBER Books, National Bureau of Economic Research, Inc, number brow12-1, May.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 12852.

    Handle: RePEc:nbr:nberch:12852

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Poterba, James, 2001. "Estate and gift taxes and incentives for inter vivos giving in the US," Journal of Public Economics, Elsevier, vol. 79(1), pages 237-264, January.
    2. Nordblom, Katarina & Ohlsson, Henry, 2006. "Tax avoidance and intra-family transfers," Journal of Public Economics, Elsevier, vol. 90(8-9), pages 1669-1680, September.
    3. B. Douglas Bernheim & Robert J. Lemke & John Karl Scholz, 2001. "Do Estate and Gift Taxes Affect the Timing of Private Transfers?," NBER Working Papers 8333, National Bureau of Economic Research, Inc.
    4. Wojciech Kopczuk, 2007. "Bequest and Tax Planning: Evidence from Estate Tax Returns," The Quarterly Journal of Economics, MIT Press, vol. 122(4), pages 1801-1854, November.
    5. Joulfaian, David & McGarry, Kathleen, 2004. "Estate and Gift Tax Incentives and Inter Vivos Giving," National Tax Journal, National Tax Association, vol. 57(2), pages 429-44, June.
    6. David Joulfaian, 2005. "Choosing Between Gifts and Bequests: How Taxes Affect the Timing of Wealth Transfers," NBER Working Papers 11025, National Bureau of Economic Research, Inc.
    7. McGarry, Kathleen, 2001. "The cost of equality: unequal bequests and tax avoidance," Journal of Public Economics, Elsevier, vol. 79(1), pages 179-204, January.
    8. McGarry, Kathleen, 1999. "Inter vivos transfers and intended bequests," Journal of Public Economics, Elsevier, vol. 73(3), pages 321-351, September.
    9. Page, Benjamin R., 2003. "Bequest taxes, inter vivos gifts, and the bequest motive," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1219-1229, May.
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