South Dakota is a tax haven, but not the only one in the U.S.

The publication of the Pandora Papers put South Dakota in the spotlight as a tax haven. VERIFY has researched why the state and others have this reputation.

The Pandora Papers, a global study of the world of offshore finance, sheds light on where wealthy individuals, businesses, and governments around the world keep their money. In the United States, South Dakota was a state identified as a preferred place for the wealthy to hide their fortunes.

A TikTok video went viral with over 44,000 likes and over 1,400 shares, explaining why South Dakota has become a tax haven.

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A tax haven is a place where people live and businesses operate to avoid high taxes.

THE QUESTION

Is South Dakota a tax haven?

THE SOURCES

THE ANSWER

South Dakota is considered a tax haven, but it’s not the only state – Alaska, Nevada, and Delaware also have low state taxes. Tax havens also tend to have more extensive asset protection regulations and data protection laws, expert Michael Heller told VERIFY.

“The State [South Dakota] has marketed itself for several decades as a place for very wealthy people bringing their money for both secrecy and various types of trust management – goodies they can get if they bring their money there, ”he said.

WHAT WE FOUND

Switzerland and the Cayman Islands are the best-known international tax havens – places where regulation is low and privacy is high. South Dakota has become a domestic tax haven in the United States because of its own low state taxes, privacy laws, and trust laws.

Michael Heller, professor of real estate law at Columbia Law School, told VERIFY that tax havens are not only there for the protection of assets and privacy, but are also “oases of responsibility”. Trusts can be used to avoid the responsibility of paying someone you owe money to – ex-spouse, children, business associates, someone who has been betrayed, or someone has been injured.

“The goal of these trusts today is not only to avoid taxes, but also to avoid responsibility. And in this competition, many states compete in a so-called “race to the bottom”. They are fighting to be the worst state from the standpoint of public order or collective wellbeing, ”said Heller. Those states include South Dakota, Nevada, Alaska, and Delaware, he said.

Tom Simmons, professor of law at the University of South Dakota, said VERIFY trusts are more like agreements, so there is no paper trail like you might see with corporations or LLCs.

“Unlike LLCs or corporations, they are not publicly registered with any government agency. This is one of the reasons why they are popular. In the US, they are often used in estate planning to avoid inheritance, which can expedite the distribution of an individual’s estate and, unlike a will, keeps the recipients of the estate private and out of public records, ”said Rick Kahler, a financial advisor and president from Rapid City, Kahler Financial Group based in South Dakota, VERIFY announced in an email.

“Then why was so much money going into South Dakota Trusts? That’s because South Dakota allows a trust to exist forever, while other states often limit the life of a trust to just 21 years, ”said Kahler. “Trusts with no life limit are attractive to families who want to pass their wealth on from generation to generation.”

However, these dynasty trusts do not offer US citizens any tax breaks.

So who will benefit most from keeping their thousands, millions, or billions of dollars in a trust fund in South Dakota? Non-US citizens.

Kahler said a trust would become “a tax haven only for non-US citizens if US tax rates are lower than their home country or if the parties to a trust choose not to report their income to their country’s tax authorities.”

“While all US trusts are required to report trust income for US citizens to the IRS, they are generally not required to report income to foreign governments. Non-U.S. Citizens are responsible for reporting the earnings of a trust to their governments. Anyone with criminal intent can use any trust, LLC, or company in any state as a “haven for dirty money,” “Kahler told VERIFY.

These rules were introduced decades ago, Heller said. Starting with the Foreign Account Tax Compliance Act (FATCA), which requires foreign institutions and other non-financial foreign entities to report assets of US account holders, including the funds in foreign accounts, such as in Switzerland or the Cayman Islands , are subject to retention.

Countries were then fined by FATCA for hiding money from US citizens, and Heller said after countries realized they had lost revenue, some countries were banding together to create the Common Reporting Standard (CRS) to create that would force countries to exchange information about foreign nationals money on their banks.

“But there was a kind of surprising loophole, namely that the US never joined CRS. So the USA does not report to other countries. There are wealthy people in this country who hide money. So the US FATCA law states that foreign banks like Swiss banks have to report Americans. But American banks won’t report foreigners because America hasn’t joined the CRS, ”said Heller.

“So all of a sudden, according to the common reporting standard for foreign hot money, it became very attractive to hide in the US. Because places like South Dakota offer the most beneficial trust for tax avoidance and responsibility avoidance as well as the most “ruthless secrecy,” he said.

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