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How Important Are Perpetual Tax Savings?

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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 Many American states have recently repealed the rule against perpetuities, raising concerns that the combination of tax incentives and new legal rights encourages the devotion of vast wealth to perpetual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% to 25% of just one component of the cost. Contrary to popular claims, tax benefits decline as investment returns rise. While US states that have repealed the rule against perpetuities and adopted other policies to encourage trusts host substantial trust assets, evidence from tax returns suggests that perpetual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.

Suggested Citation

  • James R. Hines Jr., 2013. "How Important Are Perpetual Tax Savings?," Tax Policy and the Economy, University of Chicago Press, vol. 27(1), pages 101-124.
    • Handle: RePEc:ucp:tpolec:doi:10.1086/671245
    DOI: 10.1086/671245
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    References listed on IDEAS

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    1. James R. Hines Jr., 2013. "The Redistributive Potential of Transfer Taxation," Public Finance Review, , vol. 41(6), pages 885-903, November.

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    More about this item

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • K11 - Law and Economics - - Basic Areas of Law - - - Property Law
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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