October 28, 2021

The World Stock Markets Tips & Targets, News, Views & Updates

The World Stock Markets Tips & Targets, News, Views & Updates

: How South Dakota became a haven for both billionaires and full-time RV-ers

As a former U.S. Marine turned full-time RV-er, Ken Lewis acknowledges he doesn’t have a lot in common with the world’s millionaires and billionaires — “not being retired military, no way,” he told MarketWatch.

That is, except for one thing: a money-minded tie to the state of South Dakota. Both RV-ers like Lewis and some of the world’s wealthiest people share an affinity for the state, a quirky commonality that reveals a lot about America’s disparate tax laws.

Why RV-ers flock to South Dakota

South Dakota is a prime destination for RV-ers like Lewis who spend their time trekking across America’s highways, back roads and campgrounds in recreational vehicles — a lifestyle many Americans have embraced during the pandemic — but need a place to call home for tax purposes.

With no income tax and easy rules for establishing residency, the state even has a cottage industry to help newcomers make South Dakota their official home. The process starts by staying just one night in the state, according to one business devoted to helping people become South Dakota residents on paper.

Lewis, 70, and his wife became South Dakota residents in 2013 as they embarked on retired life and full-time RV-ing across the country. Coming from California, Lewis factored in South Dakota’s lack of an income tax, its low sales tax, low registration fees and ease in obtaining a driver’s license for his camper. When he brings his Winnebago to a campground, Lewis says it’s common to see a lot of South Dakota license plates.

Ken Lewis, a full-time RV-er, with his Winnebago. Many RV-ers establish residency in South Dakota, for some of the same reasons that the state is a haven for wealthy people’s assets.

Photo courtesy of Ken Lewis

Two sides of the same coin

On the other hand, if your finances put you in the highest echelons not only in the country, but the world, South Dakota — with state-level laws that enable trusts to go on forever, free of state income tax, capital gains taxation and aided by court-sealed documents — is also a destination. There’s also a cottage industry to help create and maintain those trusts, which the wealthy can use to sock away assets.

The state plays a recurring role in the recent Pandora Papers investigation from the International Consortium of Investigative Journalists about the ways powerful people in the U.S. and beyond stash their wealth across the globe.

In America, South Dakota had 81 trusts scrutinized in the Pandora Papers, which was based on nearly 12 million leaked documents. That’s well ahead of Florida, the second-place state, with 37 trusts under the story’s microscope.

The fact that South Dakota attracts RV-ers like Lewis and a stack of trusts for the elite illustrates two sides of the same coin, according to Jared Walczak, vice president of state projects at the Tax Foundation, a right-leaning think tank.

“People move themselves and their assets around state tax laws and regulations,” he said, noting that South Dakota has “some of the lowest tax burdens in the country.”

People all over the income ladder will find a way to maximize their money working with the ground rules they have — but are those rules fair, especially for the wealthy? It’s a charged question, coming at a time of widening income inequality and debate on tax policies for the rich in America.

Why South Dakota is popular with billionaires

In 1983, South Dakota became the first state without an income tax to allow trusts to stay in operation without an end date — that’s a long time to forgo state-level income taxes.

Other states have followed, and others lay out lengthy, albeit set timeframes for a trust’s existence. In Nevada, a trust can last 365 years and one situated in Wyoming can last 1,000 years.

These timespans appeal to people who want to help their family for generations to come. Promotional materials for perpetual trusts in any state are “replete with thinly veiled appeals to settlors’ vanity and dynastic aspirations,” according to a Pepperdine Law Review article.

Even without state income tax, South Dakota trusts still face federal income tax obligations, said Tom Simmons, a professor specializing in trusts and estates at the University of South Dakota Knudson School of Law.  (Beneficiaries of trusts also pay federal taxes on distributions they receive from the trust, and depending on where they live, state taxes as well.)

Right now, the top 37% tax rate on ordinary income kicks in at $13,051 for trusts, according to Fidelity Investments. The top 20% capital gains rate starts at a threshold of $13,250, according to Fidelity.

The top rate arrives much quicker for a trust than for people filing their taxes.
But to face taxation in the first place, a trust would need to sell a capital asset or generate income. That can come from things like interest from a bank account, stock dividends, the sale of capital assets or lease income from a farm, Simmons noted.

One Pandora Papers critique is that trusts allow the wealthy to accumulate assets with little transparency.

Trusts “create dynastic concentrations of wealth,” said Chuck Collins, author of the “The Wealth Hoarders, How Billionaires Pay Millions to Hide Trillions.” “If you are of that level of wealth, you are thinking very long term. You are thinking of your unborn great-grandchildren and making sure they never have to work.”

South Dakota also has allure because of its statue on trusts, which is clear and elaborate on the rules that trusts and their creators, beneficiaries and administrators must follow, said Simmons.

Simmons has been a member of South Dakota’s Governor’s Task Force on Trust Administration Review and Reform for approximately eight years. The group of experts on the state’s trust law and industry is “assembled with the goal of establishing and maintaining South Dakota’s stature as the premier trust jurisdiction in the United States,” according to the state’s Department of Labor & Regulation.

South Dakota trusts can be written to protect a child’s assets in the event of a future divorce, and Simmons noted that’s a difference from certain other states. At the same time, the state’s laws say a person cannot fraudulently transfer assets into a trust to hide it from a person who might be entitled to it, Simmons noted

But good luck to the public on learning about any legal fights. “South Dakota has the most comprehensive privacy statute in the U.S. for trust matters involving court, i.e., automatic total seal in perpetuity,” according to the South Dakota Trust Company.

Differing views on the fairness of tax laws

Simmons read the Pandora Papers article but said he was still “trying to locate any serious, substantive concern that South Dakota should address.”

By Simmons’ read, the thrust of the article’s objection was that wealthy Americans were following South Dakota laws to create trusts that legally reduced the tax exposure they might have if establishing the trust in another state. As for international families with reported links to South Dakota trusts, Simmons said he expected they were “largely addressed by tax treaties.”

“I think we tend to say if I do some tax planning, if I did the standard deduction, that’s acceptable,” Simmons said. “But if the wealthy decide to take deductions they are entitled to, that’s tax avoidance.”

There are major differences between a person who may come to South Dakota in their plans to drive through the country and complex trusts situated in the state, Simmons said. The trust stays in South Dakota and some RV’ers might not be true-blue South Dakota residents and may be on the hook for state income taxes elsewhere.

But there’s a common motivator, he said. “I think people see South Dakota as a fair place that doesn’t overtax its citizens.”

Collins agrees that on a certain, technical level “there’s nothing broken” with the South Dakota trust rules and industry — but that’s because lawmakers over the years “have been vigilant in adapting their laws in the race to the bottom.”

The state is competing with other places such as Nevada and Wyoming to attract and retain trusts and the money and jobs that come with it for administrative costs, said Collins, director of the Program on Inequality and the Common Good at the Institute for Policy Studies Program.

“The problem is for the rest of us saying rich people shouldn’t be able to hide their riches in perpetuity. … And the rest of us have to pay the bill,” Collins said.

Collins sees similarities between the bevy of South Dakota trusts and the financial considerations of some full-time RV-ers coming to South Dakota. But the “big difference is I don’t see RV-ers causing a lot of harm,” he said.

He can’t say the same of trusts and the laws surrounding them, in South Dakota and elsewhere which, he says, are contributing to “grotesque inequality.”

Simmons acknowledges many trusts are built by people with wealth to keep that wealth in the family. But without a trust’s rules and safeguards, a windfall to a child who isn’t ready to come into money can be harmful too, he said — and the money could end up with crooks and unsavory hangers-on. “ I don’t think there’s any guarantee it would go where you want it to,” he said.

Lewis, speaking from Ohio with a following destination in Georgia, said he may not know what it says about South Dakota law that RV’ers and rich households both have their eyes on the state.

But for both groups, “it shows people have done their due diligence.”

If Lewis had it his way, there would be a flat tax “with no loopholes or write-offs available.” But until that moment ever comes, Lewis said the tax rules as written are fair game. “As long as there is a law that a person is able to take advantage of, they should take every chance they can to take advantage of it.”

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