Billionaires love South Dakota, a sparsely populated state of 884,000 people.
If you want to understand how American billionaires are able to pay so little tax, as exposed this June 2021 ProPublica report, look at the state of Mount Rushmore.
One tool that wealth advisers of the wealthy deploy is called a “dynasty trust”.
A dynasty trust is a form of trust designed to sequester wealth longer than regular trusts, sometimes for centuries or forever. These trusts are often formed in US states, such as South Dakota, that have suspended or changed their state “perpetuity rule,” legislation that previously limited the life of a trust. (For the full, flawed version, see this backgrounder I co-wrote on Dynasty Trusts.)
In the 1980s, South Dakota changed its laws to attract the wealthy looking to put their money in trusts (they did the same to attract the credit card industry). A few other states have followed suit, such as Wyoming and Alaska. Today, a private trust industry thrives in South Dakota, helping billionaires accumulate wealth.
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In recent decades, the South Dakota trust industry has attracted wealthy dynastic families to form “dynasty trusts,” including the Chicago Pritzker family (Hyatt hotels), the Minnesota Carlsons (Radisson hotels), the Wrigley (heirs to gum mogul William Wrigley), and others.
In my book, The Wealth Hoarders: How billionaires spend millions to hide billions, I describe how the wealth advocacy industry deploys dynasty trusts to enable very wealthy individuals (those with $ 30 million or more) to routinely avoid taxes on wealth transfers, c that is, taxes on inheritance, gifts and generation skipping. A recent talk by ProPublica revealed how the super-rich are also deploying Granter Retained Annuity Trusts (FREEs) and other loopholes to protect their wealth. Billionaires will often use both methods to aggressively avoid taxes.
Because the super-rich avoid or reduce their taxes, they shift the obligations to pay society’s investments onto low- and middle-income households. Dynasty trusts also reinforce existing levels of wealth inequality and facilitate the formation of dynastic concentrations of hereditary wealth and power.
Lawmakers should act at the federal level to stop or discourage the formation of dynasty and FREE trusts for the purposes of tax evasion and dynastic succession. Actions could include adopting a “federal rule against perpetuities,” banning certain trust agreements and taxing income and wealth from trusts.
Congress debates federal tax policies, including estate tax reform and the taxation of billionaires. But they won’t be successful if the super-rich can park their wealth in South Dakota Dynasty trusts.
To learn more, read the full IPS Guidance Note: “Dynasty Trusts: How the Wealthy Shield Trillions from Taxation Onshore”, by Kalena Thomhave and Chuck Collins.