State competition for trusts

Today’s WSJ discusses the burgeoning state competition in trust law. The article notes how the competition has enabled perpetual “dynasty” trusts through the abolition in many states of the rule against perpetuities, that some states don’t tax trust assets, and that trusts can be used for asset protection purposes.  There's a deeper and more general story here about jurisdictional competition.

The best academic work on the competition for trust funds is Sitkoff & Schanzenbach’s path-breaking study. As I've discussed, the work interests me in demonstrating that the real driver of state legal competition is not franchise fees or taxes, but the interests of local businesses, predominately lawyers, an I idea I first discussed in Delaware, Lawyers and Choice of Law, 19 Delaware Journal of Corporate Law 999 (1994). Lawyers compete for clients by maintaining the law of the state in which they are licensed. I proposed this as a rationale for lawyer licensing in Lawyers as Lawmakers: A Theory of Lawyer Licensing, 69 Mo. L. Rev. 299 (2004).

In the case of trusts, revenues to trust companies are clearly also significant in driving the competition, as Sitkoff & Schanzenbach demonstrate. Taxes are clearly not a factor – the states that are winning the trust competition are the ones that don’t tax trusts. Thus, although the WSJ article says that “[s]tate politicians are hoping to get a piece of the trillions of dollars that Baby Boomers and their parents are expected to pass to successive generations over the next few decades,” the payoffs to the politicians are only the usual “rents” politicians in helping local business.

While the state competition for dynasty trusts is arguably benign, the competition for asset protection is a bit more suspect. This isn’t the usual story with limited liability business associations, where creditors generally are compensated for any extra risk from the limited liability. Asset protection trusts take the protection down a level to individuals, such as professionals who legally can’t protect themselves from liability for their own acts. The plaintiffs probably haven’t negotiated the cost of credit based on this protection. But it's also worth noting that the advent of the liability protection is clearly related to the expansion of tort liability, which is also not a contractual phenomenon.

Asset-protection business associations -- LLCs and limited partnerships -- are also part of this story. I discuss the development, problems and theoretical implications of various asset protection vehicles, focusing on business associations, in Reverse Limited Liability and the Design of Business Associations.