Moguls Rent South Dakota Addresses To Avoid Taxes
Among the nation's billionaires, one of the most sought-after pieces of real estate right now is a quiet storefront in Sioux Falls, S.D.
A branch of Chicago's Pritzker family rents space here, down the hall from the Minnesota clan that controls the Radisson hotel chain, and other rooms held by Miami and Hong Kong money.
Don't look for any heiresses in this former five-and-dime. Most days, the small offices that represent these families are shut. Even empty, they provide their owners with an important asset: a South Dakota address for their trust funds.
In the past four years, the amount of money administered by South Dakota trust companies like these has tripled to $121 billion, almost all of it from out of state. The families needn't actually move to South Dakota, or deposit their money at a local bank, or even touch down in the private jet. Little more than renting an address in Sioux Falls is required to take advantage of South Dakota's tax-friendly trust laws.
States like South Dakota are "creating laws that are conducive to a massive exploitation of a federal tax loophole," said Edward McCaffery, a professor at the University of Southern California's Gould School of Law. "We have a tax haven in our midst."
South Dakota's sudden popularity illustrates how, at a time of rising U.S. economic inequality, the wealthiest Americans are embracing ever more creative ways to reduce taxes legally. Executives at South Dakota Trust Co., one of the biggest in the state, estimate that one-quarter of their business comes from special vehicles known as "dynasty trusts," which are designed to avoid the federal estate tax. Creation of such trusts has surged in recent years as changes in federal law enabled more money to be placed in them.
While the super-rich use various tools to escape the levy—some have exotic names like the "Jackie O" trust and the "Walton GRAT"—the advantage of dynasty trusts is that they shield a family's wealth forever. That defies the spirit of the estate tax, enacted almost 100 years ago to discourage the perpetuation of dynastic wealth.
The dynasty trust isn't South Dakota's only lure. Another attraction, for customers in places like New York and Massachusetts, is the chance to shelter their investments from income taxes in their home states. In November, a government commission in New York recommended tightening trust laws to avoid income-tax leakage to states like South Dakota, estimating the change would raise an extra $150 million a year.
Still others are drawn to South Dakota's iron-clad secrecy, and protections of trust assets from creditors and ex-wives. Many of these features emulate those available in Bermuda and other island havens. Some wealthy families are also attracted by South Dakota rules that enhance their control over investment decisions and make it easier for them to set up their own trust companies rather than rely on a bank trustee.
In South Dakota, a farm state that's home to two of the 10 poorest counties in the U.S., lawmakers say they're bolstering the trust industry to generate work for local law firms and bankers, and forge ties with prosperous families that may one day decide to build a factory or a warehouse here. The legislators are turning the Mount Rushmore State into the Bermuda of the prairie.