Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes

This paper presents the results of the first empirical study of the domestic jurisdictional competition for trust funds. In order to open a loophole in the federal estate tax, a rash of states have abolished the Rule Against Perpetuities. Based on reports to federal banking authorities, we find that through 2003 a state\u27s abolition of the Rule increased its trust assets by $6 billion (a 20 percent increase on average) and increased its average trust account size by $200,000. These estimates imply that roughly $100 billion in trust funds have moved to take advantage of the abolition of the Rule. Interestingly, states that levied an income tax on trust funds attracted from out of state experienced no increase in trust business after abolishing the Rule. This is a striking finding for the theory of jurisdictional competition, because it implies that abolishing the Rule does not directly increase a state\u27s tax revenue. Yet the jurisdictional competition for trust funds is patently real and profound. Our findings also speak to unresolved issues of policy concerning state property law and federal tax law