Note: The Good, the Bad, and the Ugly: The Political Economy and Unintended Consequences of Perpetual Trusts

Daniel J. Amato
[FULL-TEXT PDF]
86 S. Cal. L. Rev. 637

President Obama’s 2012 and 2013 budget proposals contained similar provisions to tax perpetual trusts ninety years after their creation at the maximum Generation-Skipping Tax rate of 55 percent—a move consistent with arguments by law professors and the American Law Institute. These proposals went little noticed except by investment publications, which advised individuals to create perpetual trusts before they could be taxed. Despite the support of the legal academy, the president’s proposal stands little chance of success. Nor should it come as a surprise that a tax proposal with little chance of success was proposed at the beginning of an election cycle—instead, as this Note explains, it should be expected.

Perpetual trusts, facilitated by the 1986 enactment of the Generation-Skipping Tax Exemption (“GST Exemption”) and the subsequent repeal of the rule against perpetuities (“RAP”) in most states, allow individuals to place money into trusts where it grows free of intergenerational transfer taxes forever. Prior to the 1986 tax reform, individuals could use successive life estates in trust to transfer money to their grandchildren without triggering the estate tax. To close this loophole, Congress enacted the Generation-Skipping Tax (“GST”) in 1986 to tax transfers to individuals more than one generation removed, and the GST Exemption to soften the taxpayer burden. [MORE]