Here’s how states like South Dakota have become global tax havens
October 5, 2021 | Kate Dore, CFP®
- The Pandora Papers, a collection of nearly 12 million private financial records, reveal the global tax havens of the affluent and powerful.
- The super-wealthy have dodged levies by hiding money in mansions, yachts and other property in low-tax places worldwide.
- Trust companies in South Dakota, Nevada and more than a dozen other states have made it easier for the elite to dodge taxes, according to published reports.
Offshore tax havens have long been a refuge for wealthy individuals trying to hide assets.
Now, states like South Dakota, Nevada and others have also become magnets for those dodging taxes.
The documents revealed those hiding money in mansions, yachts and other property in low-tax sanctuaries worldwide.
“These people are what Charlie Murphy would call ‘habitual line steppers,’” said Eric Pierre, an Austin, Texas-based certified public accountant, owner of Pierre Accounting and co-host of the CPA Huddle podcast.
Historically, when the ultra-wealthy wanted to shelter money from creditors or taxing authorities, they funneled money into places like Switzerland or the Cayman Islands, said Michael Heller, vice dean and professor of real estate law at Columbia Law School.
A few years later, other countries agreed to disclose foreign-held assets to each other, known as the Common Reporting Standard. However, the U.S. doesn’t follow this practice, Heller said.
U.S. tax havens
Without rules to report foreign-owned assets to investors’ respective countries, the U.S. has become “the world’s dumping ground for hot money,” Heller said.
“Foreign wealthy families wanted to come to the U.S. because they got both the security from the U.S. banking system and the secrecy that they formerly got from places like Switzerland,” he said.
And some states have altered tax and estate policies to capture the inflows of wealth, Heller said, boosting the appeal for domestic and investors abroad.
Tax shelters in South Dakota
South Dakota, in particular, has become a “major destination for foreign assets,” according to the Pandora Papers, with 81 trusts named in the report.
The state’s trust assets have more than quadrupled to $360 billion over the past decade, the report finds.
“Year after year in South Dakota, state lawmakers have approved legislation drafted by trust industry insiders, providing more and more protections and other benefits for trust customers in the U.S. and abroad,” the Papers said.
One of the biggest incentives is the state’s ban on the “rule against perpetuities” for so-called dynasty trusts, allowing families to pass wealth from generation to generation, indefinitely, without estate taxes at each death.
“You can set up a [dynasty] trust in South Dakota, and it can go on forever,” said certified financial planner Rick Kahler, president of Kahler Financial Group in Rapid City, South Dakota.
By contrast, many states limit dynasty trusts, with caps of 21 years after the death of the last beneficiary upon creation in some places.
Another perk in South Dakota is access to so-called domestic asset protection trusts, which may guard investments against creditors while still offering some control over the property.
These trusts can make it easier for someone to shield money from ex-spouses, estranged business partners and other judgments, Pierre said.
The person in charge of the trust, known as the trustee, may also have the flexibility in South Dakota to move funds from one trust to another, known as decanting, Heller said.
Moreover, the state doesn’t have income, capital gains, estate or inheritance taxes.
“There’s no doubt that a lot of money has come to South Dakota,” said Kahler.
“It has been good economically,” he said. “And quite frankly, I have never heard of this type of abuse.”