Executive Summary

Wealth Transfer and Trusts as a Growth Industry

The United States is entering a period of one of the largest wealth transfers in its history. Studies predict that the 78 million baby boomers will transfer $12 trillion in wealth by the decade’s end and $41–$136 trillion by the middle of the century. Several factors support the use of trusts to carry out this transfer, meaning that states with the most favorable trust laws will capture the majority of this transfer, and the new businesses and jobs that come with it.

Colorado’s Unfavorable Trust Laws and Negative Trend

Trusts administered in Colorado are subject to taxation on income and capital gains retained within the trust, whereas many states do not tax income and capital gains until they are paid out to beneficiaries. This creates an incentive for trustees to avoid Colorado, which is evidenced by the rate at which Colorado has been losing trust assets. From 2001 to 2011, Colorado saw a 60% decline in personal trust and agency accounts, while neighboring states with friendlier laws saws a 276% increase. This is costing Colorado jobs, and without change Colorado will continue to miss out on the upcoming growth.

The Solution: Remove Colorado’s Tax on Resident Trusts

Despite its devastating effects on the industry, Colorado’s fiduciary tax averages -only $25 million a year, and makes up less than .4% of the state’s revenue. By removing the tax, the state could bring in up to 3 times this amount in additional corporate and personal income tax revenues. Our study projects that by removing the tax on resident trusts, the increased trust business would create between 9,330 to 21,755 jobs by 2024, easily paying for the lost trust taxes with increased corporate and personal income taxes. By 2024, the state would collect additional taxes of $17-$64 million, as well as replacing all current fiduciary tax revenue. The high end of this projection assumes Colorado captures just over 1% of the projected $12 trillion wealth transfer, a low estimate given the state’s robust foundation, strong professional financial base, nationally recognized universities, and ability to attract top talent through high quality of life.

These projections assume that all $25 million of 2012’s trust tax revenue would be lost. In reality, much of this tax revenue comes from taxes collected on out‐of‐state trusts with Colorado income, which would still be taxed under our proposal. While we cannot get an exact breakdown of revenue from in-state versus out‐of‐state trusts from the Department of Revenue, we estimate that less than half of the State’s trust revenue comes from Colorado administered trusts. Therefore, the state would still receive taxes from any out-of‐state trust with Colorado income. Therefore, only half of the currently collected tax would be lost, allowing the projected net increases to reach a maximum of $77 million by 2024.

In short, this is a rare opportunity to create a broad base of professional jobs while potentially tripling the revenue the state currently receives from fiduciary taxes.

~ Common Sense Policy Roundtable