Here’s how states like South Dakota have become global tax havens

On Oct 5, 2021

Downtown Sioux Falls, South Dakota

Dan Brouillette | Bloomberg | Getty Images

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.

That’s according to the Pandora Papers, a collection of nearly 12 million leaked private financial records gathered by the International Consortium of Investigative Journalists.

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.

While banking abroad isn’t illegal, some Americans and U.S. companies failed to report earnings. Congress cracked down in 2010 with the Foreign Account Tax Compliance Act, requiring international banks to report U.S.-owned accounts.

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…