Here’s how states like South Dakota became global tax havens
Downtown Sioux Falls, South Dakota
Dan Brouillette | Bloomberg | Getty Images
Offshore tax havens have long been a haven for wealthy people trying to hide assets.
Now states like South Dakota, Nevada, and others have also become magnets for those who avoid taxes.
This is according to the Pandora Papers, a collection of nearly 12 million leaked private financial documents assembled by the International Consortium of Investigative Journalists.
The documents revealed those who were hiding money in mansions, yachts and other property in low-tax shrines around the world.
“These people are what Charlie Murphy would call ‘usual line steppers’,” said Eric Pierre, a chartered accountant based in Austin, Texas, owner of Pierre Accounting and co-host of the CPA Huddle podcast.
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Historically, when the ultra-rich wanted to keep money safe from creditors or tax authorities, they would send money to places like Switzerland or the Cayman Islands, said Michael Heller, vice-dean and professor of real estate law at Columbia Law School.
While offshore banking is not illegal, some US and US companies have not reported their income. Congress cracked down in 2010 with the Foreign Account Tax Compliance Act, requiring international banks to report accounts owned by the United States.
A few years later, other countries agreed to share assets held abroad with each other, known as the Common Reporting Standard. However, the United States does not follow this practice, Heller said.
American tax havens
Without rules for reporting foreign assets to investors’ respective countries, the United States has become “the world’s dumping ground for hot money,” Heller said.
“Wealthy foreign families wanted to come to the United States because they had both the security of the US banking system and the secrecy they previously got from places like Switzerland,” he said.
And some states have changed their tax and estate policies to capture inflows of wealth, Heller said, increasing the appeal for domestic and foreign investors.
Tax shelters in South Dakota
South Dakota, in particular, has emerged as 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 in the past decade, according to the report.
Year after year in South Dakota, state lawmakers have approved legislation drafted by trust industry insiders, increasingly offering protections and other benefits to trusted clients in the United States and abroad, “the newspapers said.
One of the biggest incentives is the state ban on the “rule against perpetuities” for so-called dynasty trusts, allowing families to pass wealth from generation to generation, indefinitely, without taxes. inheritances on 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.
In contrast, many states limit dynasty trusts, with caps of 21 years after the death of the last beneficiary upon creation in some places.
Another advantage in South Dakota is access to so-called national asset protection trusts, which can protect investments from creditors while still providing some control over property.
These trusts can make it easier for someone to protect 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 option in South Dakota to transfer funds from one trust to another, known as settling, Heller said.
In addition, the state has no taxes on income, capital gains, inheritance or inheritance.
“There’s no question that a lot of money has come to South Dakota,” Kahler said.
“It has been good economically,” he said. “And frankly, I’ve never heard of this type of abuse.”