Look What’s Hiding Here

January 16, 2020 Posted by: Category: Blog No comments

Everyone understands the concept of a “tax haven” — a delightfully sunny island somewhere in the subtropics, or a cozy European duchy tucked away on a scenic Alpine lake. Perhaps the global rich who take advantage of these safe deposit boxes just want someplace nice to stay when they visit their money. Surely that’s why places like Kazakhstan and Burundi struggle to attract their share of global “flight capital.” Tucking your money someplace miserable would just be silly when the world offers so many sunnier places for shady people to park their cash.

Except, it turns out not every tax haven lures depositors with sunny beaches, high-rise condos, and Hermès boutiques. In fact, there’s a new financial hot spot that’s grown from $57 billion to $355 billion in assets in just a single decade. No, there’s not a Lamborghini dealer in site. “Dakota” is the name . . . specifically, South Dakota, the Mount Rushmore State. It’s a mostly flat, featureless landscape that shares a 383-mile border with North Dakota — a place whose very name suggests such bleak desolation that officials once considered dropping “North” from the name entirely.

(Did you know we even have two Dakotas? Not everyone does!)

Trusts, not taxes, are the main reason South Dakota has become such a go-to spot for foreign money. Keeping your principal safe, it turns out, is sometimes even more important than keeping your income safe from taxes. If you’re a Russian potash oligarch worried about Putin seizing your mines, a central African kleptocrat losing sleep over the ethnic minority you’ve been oppressing for a generation, or el jefe of a middling Columbian cartel, you want to stash your “safe” money someplace where no one can even find it, let alone steal it back.

Let’s see . . . Switzerland is too obvious, the Caymans are too cliched, and the Cook Islands are just too far away. Look at this, though — the United States is the only major financial center that’s not part of the international “Common Reporting Standard” agreement, so they won’t report your U.S. assets back to your homeland!

Having said that, South Dakota trusts offer game-changing tax benefits for American money, too. If you leave your assets to your heirs in a regular trust, anything over about $12 million per person gets whacked by estate taxes at 40% — every generation. Most rich people are rightly terrified at the thought of their wastrel heirs struggling to eke out an existence on just $12 million. South Dakota was the first state to eliminate the common-law “rule against perpetuities,” ushering in so-called “dynasty trusts” that never distribute their principal, thus avoiding transfer tax hits forever.

Eliminating that federal estate tax hit isn’t the only way South Dakota trusts help rich people keep their assets under wraps. Local legislators have also made South Dakota the only state allowing true perpetual trusts with no state income tax, no tax on capital gains, and no state-level estate tax at all. Finally, South Dakota courts let trust grantors, fiduciaries, and beneficiaries seal filings and orders, in perpetuity, for ultimate privacy.

The lesson here is that you’ll never know where the most powerful financial strategies are lurking. That’s why we spend so much time looking for them, so we can put them to work for you!