Friday, October 4, 2013
Lawrence W. Waggoner (University of Michigan Law School) recently published an article entitled, Congress Promotes Perpetual Trusts:Why? (September 2013). Provided below is the abstract of the article:
By unwittingly granting a tax exemption for perpetual trusts, Congress undermined state perpetuity law and promoted private trusts that can last and remain tax exempt for many centuries and maybe forever. As a direct result of Congress’s action, and then of lobbying by financial institutions and other interest groups to convince state legislatures to remove the obstacle of perpetuity law, the very wealthy can now create tax-exempt private trusts for generations upon generations of their descendants. And they are massively taking advantage of the opportunity.
Congress as an institution has known of its blunder for years, but has failed — so far — to remedy its mistake. The author asks why. There is no federal interest in promoting perpetually tax-exempt trusts and, in fact, the federal interest cuts the other way. Tax revenues are lost by Congress’s action and subsequent inaction. A plausible explanation for Congress’s persistent indifference to the problem is that the revenue gain by correcting the oversight would be a long way off. Congress is not known for giving a high priority to problems of that sort. The longer Congress procrastinates, however, the amount of wealth that is safely sheltered in perpetually tax-exempt trusts — already estimated to be in the billions of dollars — continues to grow.
The Treasury Department has a proposal before Congress for remedying the situation, but the Treasury’s proposal is not nearly as effective as it could and should be. The author proposes a remedy that would be entirely effective and would be consistent with the original purpose of the tax law.