Missing Link: Trust Receipt and Net Worth

• In Event: 367 - Regular Session. Affluence/Wealth

Abstract

Trust funds are implicated in perpetuating wealth inequality by allowing wealthy transferors to protect recipients’ wealth advantage. Yet, the degree to which trusts successfully safeguard transferred wealth is unclear. For other wealth transfers, such as inheritances, recipient net worth increases by less than one dollar for each dollar of transferred wealth, as a large share of each transfer is spent or lost by the recipient. We argue this tendency may be particularly strong in recipients of trusts, who may be adversely selected for their perceived inability to retain the transferred wealth without the help of formal controls. To test the implications of this argument, we report the first quantitative results on the relationship between trust value and recipient net worth. We find no significant association between trust value and subsequent net worth, consistent with the theory that transferors attempt to use trusts to control the behavior of recipients who are particularly likely to lose or spend down the transferred assets. The lack of evidence for greater net worth among recipients of larger trusts (compared to recipients of smaller trusts) highlights the ambiguity of behavioral responses to becoming a trust fund beneficiary.

Authors

• Dmitry Tumin, The Ohio State University

• Michael David Nau, The Ohio State University