Hundreds of Billions of Dollars are Pouring into Delaware and South Dakota, Why?
Over the last 10 years, hundreds of billions of dollars have poured into a small number of American states: Delaware, Nevada, Wyoming – and, above all, South Dakota. A decade ago, South Dakotan trust companies held $57.3 bn in assets. By the end of 2020, that total will have risen to $355.2 bn.
“To some, South Dakota is a ‘fly-over’ state,” the chief justice of the state’s supreme court said in a speech to the legislature in January. “While many people may find a way to ‘fly over’ South Dakota, somehow their dollars find a way to land here.”
Many super-rich people are choosing South Dakota because it has created a potent protection for their money in the form of a South Dakotan trust. Normally a person puts money in the bank and the government taxes what little interest it earns. Additionally that money is not protected from divorce or legal proceedings. While a South Dakota Trust won’t protect you from criminal prosecution, it does prevent information on your assets from leaking out in a way that might spark interest from the police. And it shields your wealth from the government, since South Dakota has no income tax, no inheritance tax and no capital gains tax. South Dakota has become the best place in the world to stay rich.
According to an official in a traditional tax haven, the protections offered by states such as South Dakota are undermining global attempts to control tax dodging, kleptocracy and money-laundering. “One of the core issues in fighting a guerrilla war is that if the guerrillas have a safe harbour, you can’t win,” the official told me. “Well, the US is giving financial criminals a safe harbour, and a really effective safe harbour – far more effective than anything they ever had in Jersey or the Bahamas or wherever.”
Well known for Mount Rushmore and Laura Ingalls Wilder, author of the Little House on the Prairie series, South Dakota's lasting impact on the world could be as ground zero for financial deregulation that has rocked the world’s economy.
The story does not begin with trusts, but with credit cards, and with Governor William “Wild Bill” Janklow, a US marine who became governor in 1979 and led South Dakota for a total of 16 years. In the late 70s, South Dakota’s economy was mired in deep depression, and Janklow sensed an opportunity in undercutting the regulations imposed by other states.
At the time, national interest rates were set unusually high by the Federal Reserve, meaning that credit card companies were having to pay more to borrow funds than they could earn by lending them out. Citibank had invested heavily in credit cards, and was therefore at significant risk of going bankrupt.
The bank was searching for a way to escape this bind, and found it in Janklow. “We were in the poorhouse when Citibank called us,” the governor recalled in a later interview. “They were in bigger problems than we were. We could make it last. They couldn’t make it last. I was slowly bleeding to death; they were gushing to death.”
Citibank promised Janklow 400 jobs if he abolished certain “anti-usury” rules.
“The economy was, at that time, dead,” Janklow remembered. “I was desperately looking for an opportunity for jobs for South Dakotans.” In 1981, to help Citibank, the governor abolished laws that set an upper limit to the interest rates lenders could charge. When Citibank based its credit card business in Sioux Falls, it could charge borrowers any interest rate it liked, and credit cards could become profitable. Thanks to Janklow, South Dakota has a financial services industry, and the US has a trillion-dollar credit card debt. Janklow next turned to a way to free wealthy individuals the same way he did the Citibank, and thus came to the decision to deregulate trusts.
Initially, South Dakota’s so-called “dynasty trusts” were advertised for their ability to dodge inheritance tax, thus allowing wealthy people to cement their family’s long-term control over property. It also gave plenty of employment to lawyers and accountants.
Janklow also looked to the future. Currently South Dakota’ has a trust task force, it exists to maintain the competitiveness of the state’s trust industry. Tom Simmons, an expert on trust law at the University of South Dakota and member of this task force says, “Janklow was truly a genius in seeing this would be economic development with a very low cost to the government. It’s a clean industry, there are no smokestacks, we don’t have to mine anything out of the earth or anything, and they’re generally good paying jobs,” said Tom Simmons, an expert on trust law at the University of South Dakota.
Thanks to the taskforce, South Dakota now gives its clients tricks to protect their wealth that would have been impossible 30 years ago.
- Trust creators can be a beneficiary of their own trust
- Once two years have passed, the trust is immune from any creditor claiming a share of the assets it contains, no matter the nature of their claim.
- A South Dakotan trust is secret - Court documents relating to it are kept private for ever, to prevent knowledge of its existence from leaking out.
- South Dakota, which had crafted “purpose trusts” do not like other states impose limits on how a purpose trust can care for a pet.
“The smart people want privacy,” explained Harvey Bezozi, a Florida financial adviser and tax expert who blogs under the name Your Financial Wizard. “South Dakota offers the best privacy and asset protection laws in the country, and possibly in the world, for the wealthy to protect their assets. They’ve done a pretty good job in making themselves unique; a real boutique place where the people in the know will eventually gravitate to.”
In the aftermath of the great financial crisis many American voters blamed bankers for costing so many people their jobs and homes. News came out that UBS had hidden billions of dollars for its wealthy clients, banks were not just exploiting poor people, they were helping rich people dodge taxes. Congress responded with the Financial Assets Tax Compliance Act (Fatca), forcing foreign financial institutions to tell the US government about any American-owned assets on their books.
The rest of the world created a global agreement called the Common Reporting Standard (CRS). Under CRS, countries agreed to exchange information on the assets of each other’s citizens kept in each other’s banks. The tax-evading appeal of places like Jersey, the Bahamas and Liechtenstein disappeared since you could no longer hide your wealth there. Fortunately the US was not part of CRS, and its own system – Fatca – only gathers information from foreign countries; it does not send information back to them. This loophole was unintentional, but vast: The US was on its way to becoming a truly world-class tax haven.
“The easy takeaway is that people are trying to hide. But wanting to be private, to be confidential, there’s nothing illegal about that,” said Matthew Tobin, the managing director of the South Dakota Trust Company (SDTC). Tobin added that many foreign clients had wealth in another jurisdiction, and worried that information about it could be reported to their home country, thanks to CRS. “That could put them at risk. They could be at risk of losing their wealth, it could be taken from them. There’s kidnapping, ransom, hostages. There is risk in a lot of parts of the world,” he explained. “People are saying: ‘OK, if the laws are the same, but I can have the stability of the US economy, the US government, and maintain my privacy, I might as well go to the US.’”
Its not just South Dakota and its trust companies that are sucking in the world’s money. Banks in Florida and Texas are welcoming cash from Venezuela and Mexico, realtors in Los Angeles are selling property to Chinese nationals, and New York lawyers are arranging these transactions for many of their clients.
“You can look at South Dakota and its trust industry, but if you really want to look at CRS, look at the amount of foreign money that is flowing into US banks, not just into trusts,” the lawyer said. “The US has decided at very high levels that it is benefiting significantly from not being a member of CRS. That issue is much larger than trusts, and I don’t see that changing, I really don’t.”
In allowing trusts to last for ever, South Dakota did something genuinely revolutionary. That revolution has spread so putting the genie back in the bottle is practically impossible. Those of us who cannot vote in South Dakota elections have little hope of changing its laws. No one knows the long term effects of all of this because the revolution in trust law that began in South Dakota and spread throughout the US is only a generation old.
Eric Kades, the law professor at William & Mary Law School, thinks that South Dakota’s decision to abolish the rule against perpetuities for the short term benefit of its economy will prove to have been a long-term catastrophe. “In 50 or 100 years, it will turn out to have been an absolute disaster,” said Kades. “Now we’re going to have a bunch of wealthy families, and no one will be able to piss away that wealth, it will stay in the family for ever. This just locks in advantage.”
Many analyst think something must be done to correct the imbalance between global wealth and local legislation, we risk entrenching today’s inequality and creating a new breed of global aristocrat, unaccountable to anyone and getting richer all the time – with grave consequences for the long-term health of liberal democracy.
Wismer is the only person I met in South Dakota who seemed to understand this. “Ever since I’ve been in the legislature, the trust taskforce has come to us with an updating bill, every year or every other year, and we just let it pass because none of us know what it is. They’re monster bills. As Democrats, we’re such a small caucus, we’re the ones who ought to be the natural opponents of this, but we don’t have the technical expertise and don’t really even understand what we’re doing,” she confessed. “We don’t have a clue what the consequences are to just regular people from what we’re doing.”
“The voters don’t have a clue what this means. They’ve never seen a feudal society, they don’t have a clue what they’re enabling,” Wismer said. “I don’t think there are 100 people in this state who understand the ramifications of what we’ve done.”