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Mention tax havens, and most people imagine small nations with mild weather: the Bahamas, the Cayman Islands, Malta.
But South Dakota and a handful of other U.S. states are increasingly competing to attract global capital hidden from creditors, tax collectors and law enforcement, according to a survey released by the International Consortium. investigative journalists.
The sparsely populated state, better known as the Home of Mount Rushmore, is now home to $ 360 billion in trusts, the ICIJ reported – an amount that has quadrupled in the past decade. A local company, the South Dakota Trust Company, has international clients from 54 countries. Another, Trident Trust, speaks of the “South Dakota Advantage”.
The ICIJ investigation, which relied on a leak of millions of confidential documents, identified 201 trusts in the United States, many of which are linked to foreign funds. Eighty-one of these trusts were based in South Dakota, Nevada, Florida and Texas also housing a significant number of trusts.
Indeed, the United States is now ranked the world’s second largest tax haven by the Tax Justice Network, home to more money than any other except the Cayman Islands.
“President Biden needs to match his own rhetoric on shutting down global illicit financing and start with the biggest offender – his own country,” Alex Cobham, the group’s chief executive, said in a statement.
Tax shelters are legal
The ICIJ’s investigation did not charge any of the people or companies it named with illegal activities or other wrongdoing, but it did reveal the massive amounts of wealth arriving on America’s shores.
Among Trident’s clients, according to the ICIJ, are the recently elected President of Ecuador, Guillermo Lasso, who allegedly transferred millions into a trust with the company in 2017; the former head of a sugar company in the Dominican Republic, who created a $ 14 million trust for his four daughters; and a Brazilian orange juice executive who settled wrongdoing charges with Brazilian and US regulators.
Lasso told the ICIJ that he complied with all laws. Trident told the outlet that it was “fully committed to complying with all applicable regulations” and that it “regularly cooperates with any competent authority that requests information.”
The revelations renewed calls for reforming international tax laws and abolishing popular tax avoidance tools such as trusts and shell companies.
“Legality is the real scandal,” activist and author Cory Doctorow said on Twitter. “Each of these arrangements represents laughable fiction: a shell company is a business, a business is a person, that person resides in a desk drawer of a bank official on a distant treasure island.”
Gabriel Zucman, an economist at the University of California at Berkeley who studies income inequality, called for a ban on “shell companies – companies without economic substance, whose sole purpose is to avoid taxes or other laws, ”the Associated Press reported.
A matter of trust
Different states in the United States specialize in different financial vehicles to help those with means to hide them from the public eye. In Delaware (Mr. Biden’s home state), it’s the limited liability company. In Florida, it’s the purchase of a condo for cash. In South Dakota, it’s called a dynasty trust – a three-part legal vehicle that has become increasingly popular as a way to transfer wealth between generations without paying taxes.
“South Dakota, from the 1990s, was a place where wealthy American dynastic families would park their wealth,” said Chuck Collins, director of the inequality program at the left-wing Institute for Policy Studies.
A trust creates a complex legal relationship between three parties: the settlor, who contributes assets to the trust; the trustee, who manages and directs the trust; and the beneficiary, who derives income from it.
“The beauty of a trust is that it puts wealth in a sort of property limbo,” Collins said. Each of the three parties can designate the others as having final control of the trust. In addition, certain types of assets placed in a trust can be significantly reduced, reduce their assessed value.
Until the mid-1980s, the life of a trust was capped at around a century – a limit that was meant to curb the intergenerational power of the wealthy, according to the Guardian. But in 1983, South Dakota abolished that limit, allowing a trust to live in perpetuity. This change has turned the state – which has no income tax, no inheritance tax, and no capital gains tax – into an attractive destination for family money.
According to an example from the South Dakota Trust Company, $ 5 million invested in a trust for 120 years, and growing at a conservative rate of 6% per year, would rise to $ 5.4 billion by the end of that period. If offered as an outright gift, without a trust and subject to tax, it would be worth a comparatively smaller $ 340 million.
A popular tactic
The use of trusts is common among the super-rich, with more than half of the top 100 Americans benefiting from a particular vehicle, ProPublica reported last week.
The list of billionaires taking advantage of one type of trust, the Grantor-Retained Annuity Trust, includes former New York City mayor and presidential candidate Michael Bloomberg; private equity mogul Stephen Schwartzman; industrialists and political funders Charles and David Koch; Facebook CEO Mark Zuckerberg and Laurene Powell Jobs, widow of Apple founder Steve Jobs, according to media reports.
Since the 1980s, other states have followed South Dakota’s lead and relaxed their own trust laws. Delaware, Florida and Texas are all home to dozens of trusts, according to the Pandora Papers survey; Delaware has 14, for example.
But South Dakota’s laws are among the most favorable to trusts. Assets held in trust are protected from creditors; court cases related to a trust are kept secret forever and, unlike other states, it is possible for a person to create a trust for themselves, rather than a third party.
Today, South Dakota has more than 100 trust companies that manage $ 367 billion in assets, according to IPS. Since 1997, the state has had a task force, dominated by the financial services industry, whose objective is “to establish and maintain South Dakota’s stature as the first trusted jurisdiction of the states. -United “.
Calls for reform
What can be good for trust services companies in South Dakota – and a handful of other small states vying to attract private wealth – is bad for the rest of the world, say many tax experts and inequality opponents . By removing family fortunes from taxes, it forces a smaller population to shoulder the burden of paying for common goods, including infrastructure, public education and health care.
“When the rich don’t pay their taxes, they pass that obligation on to everyone else. They’re basically having trouble,” Collins said.
Senator Sherrod Brown, an Ohio Democrat who chairs the Senate Banking Committee, said the ICIJ investigation showed “blatant abuses of our legal and tax system, which empower criminals and fuel global inequality by allowing wealthy elites to avoid paying their fair share “and forcing workers” to make a difference. “
Democrats in Congress pitched the idea of cutting trusts and other tax avoidance measures as part of an expansion of the federal social safety net. The solutions, however, prove elusive.
The Associated Press contributed reporting.
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