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Prairie Bermuda: Rich Tax Dodgers Exploit South Dakota

Read this Bloomberg article on South Dakota's blossoming dynasty trust industry, and try singing "Hail, South Dakota!" with a straight face. We're helping billionaires shelter $121 billion in assets, promoting income inequality and tax-dodging:

States like South Dakota are “creating laws that are conducive to a massive exploitation of a federal tax loophole,” said Edward McCaffery, a professor at the University of Southern California’s Gould School of Law. “We have a tax haven in our midst.”

South Dakota’s sudden popularity illustrates how, at a time of rising U.S. economic inequality, the wealthiest Americans are embracing ever more creative ways to reduce taxes legally. Executives at South Dakota Trust Co., one of the biggest in the state, estimate that one-quarter of their business comes from special vehicles known as “dynasty trusts,” which are designed to avoid the federal estate tax. Creation of such trusts has surged in recent years as changes in federal law enabled more money to be placed in them [Zachary R. Midler, "Moguls Rent South Dakota Addresses to Dodge Taxes Forever," Bloomberg, 2013.12.26].

Wait: so South Dakota doesn't really want the estate tax to go away. We depend on that tax to support our tax-dodging industry!

Citing South Dakota's "iron-clad secrecy" as another draw for these rich tax dodgers, Midler compares us to Bermuda and other offshore-account havens. Of all the ways we could emulate a tropical paradise, why, why, must this be the only one?

South Dakota doesn't even get that much out of the deal. The trustholders draw their cash and spend it in the real Bermuda and other fancier places. We rent a few storefronts, hire a few lawyers and bankers, and draw about $1.2 million extra in bank franchise tax. But Governor Dennis Daugaard gladly bows and scrapes to these tax-dodgers, in unsubstantiated hopes that maybe they'll throw us a bigger bone:

“If you’ve got several hundred well-paying jobs, it’s worth it to us,” said Governor Dennis Daugaard, a Republican who used to travel to Minneapolis pitching tax-saving trusts when he worked at a bank in Sioux Falls. “It also gives us the opportunity to develop relationships with people who have the ability to encourage business here of other sorts. Now, I can’t point to a single case where that’s occurred yet, but I think it’s possible.”

When he’s away on state business in New York or Chicago, Daugaard said, he sometimes takes time to meet with wealthy clients of the South Dakota trust industry. He said he thanks them for doing business in his state [Midler, 2013.12.26].

He probably sends them Christmas cards, too... from the Netherlands.

When Governor Daugaard hands a French cheese factory a state check for $5 million, he can at least argue that he's investing in 400 new South Dakota jobs and an enormously expanded market for the local dairy industry. But when we rejigger our laws to help a few rich people dodge taxes (Midler links to this table on the estate tax and says that fewer than 1 in 700 Americans pay estate tax), we get little in return besides a reputation as easily exploitable rubes.

Update 13:00 CST: Among the barristers whose business we boost with our Bermudan bamboozling is Jeffrey T. Sveen, a founder and director of First Lawyers Trust Company, which appears to have most of its staff out of state but which declares its main business address as 400 Capitol Building, 415 South Main Street, Aberdeen, South Dakota, the location of Sveen's Siegel Barnett & Schutz law firm. FLTC emphasizes that it is not a bank, which suggests they do not pay bank franchise tax on the money they make from their wealthy clients. Sveen... not a bank... now why does that sound so familiar?


  1. Rick 2013.12.27

    Amen, Cory!

    If we've learned anything from the Rounds GOED Scandal is nothing is free. If we don't see a transparent payment for services/benefits rendered, then very likely there are nontransparent payoffs involved.

  2. John Tsitrian 2013.12.27

    What's so rube-like about capitalizing on a perfectly legal situation and making some money from it?

  3. Roger Cornelius 2013.12.27

    What bothers me about this scheme is that by hiding their billions in South Dakota the rich don't have to pay their fair share to the federal government, and yet as pointed out in article, South Dakota derives half its revenue from a bankrupt America.

  4. Jerry 2013.12.27

    Another reason why drugs will not be legalized in South Dakota as it interferes with the drug cartel money we launder here. My what a proud moment we have here now, as where there are secretive hidden off shore funds, you have money laundering. When you have secretive deals whispered in high places, you have corrupt EB-5 money as well. Lets face it, Republicans may not be able to govern, but they sure know how to look the other way when it comes to crooked dealings, somebody prove me wrong. Tony Soprano would be proud as a feller could get himself killed even knowing about stuff like this.

  5. mikeyc, that's me! 2013.12.27

    If you really want to find rich tax dodgers, look no
    further than our large credit union industry.

  6. Richard Schriever 2013.12.27

    So, this would e what's driving the recent rise in "SD's" median income levels then?

  7. SuperSweet 2013.12.27

    I was at an RV park in Galveston, TX and there was a big rig with Sd license plates. So I introduced myself to the owner and asked where he was from. He replied "the coast." After further discussion he is a P.O box holder in SD to avoid income taxes. I know there are a lot of these out there, this was just the first one I have met.

    What's different about these out-of-staters who dodge their state income taxes and the trust industry dodgers?

  8. Cranky Old Dude 2013.12.27

    Look again-it says $121 Billion not 12...a nice chunk o' change in a state that has a $4B annual budget, eh?

  9. oldguy 2013.12.27

    the thing that sticks out here is Sveen who is the same person involved in the EB 5 mess

  10. caheidelberger Post author | 2013.12.27

    Supersweet, the difference may simply be a couple more zeroes at the ends of their gross income.

    Richard... that is a very interesting question. I don't think these dynasty trusts are paying out benefits to many if any recipients in South Dakota. The money sits here, but it gets paid out J. Wellington Woollseypants IV at his Italian castle.

  11. Deb Geelsdottir 2013.12.27

    John T and all Madizens:

    To me it is crucially important to differentiate between "perfectly legal" and "moral, ethical."

    Laws that protect those who have at the expense of people who struggle are neither moral or ethical. Legality is merely a technicality which absolves no one from their bad behavior.

    The point of anyone's life is not excessive accumulation. It is what one does that is ethical and moral. Using the mantra that it is "perfectly legal," is no excuse for making life more difficult for other human beings.

    *John T - To be sure, I am not pointing this comment on you particularly. I addressed it to you because you used the phrase "perfectly legal." I addressed it to all Madizens because I've heard others employ a similar rationalization.

  12. Donald Pay 2013.12.27

    Interesting. Who knew I was shirt-tail related to this bit of money grubbing? Pierce III's grandfather was my grandmother's brother.

    This is just typical of South Dakota. If you can't make it with honest work, you find some sort of barely legal angle to slice a piece out of someone else's money. Generally it involves a federal Superfund site, so this is at least a bit better than uranium or gold mines. Sometimes I think these scams are just ways to circulate the money of the wealthy elites among themselves, like old time Bingo days at Catholic churches hall used to serve to circulate the money of the poor.

    The thing that interests me the most about the Bloomberg article is the bank heist story. I remember hearing that story as a kid, but was never sure whether it was some tall tale being spun to a kid. Now I see it might have been real.

  13. caheidelberger Post author | 2013.12.28

    I duly note Deb's distinction between "perfectly legal" and "moral."

    John T., the situation is different from what you posit. Donald's second cousin didn't wake up one morning, notice that South Dakota law didn't prohibit dynasty trusts, and decide to get some money while the getting was good. He (or his banker/lawyer friends) wrote the law to make legal their scheme and continue to use their official task force authority to bend the law to their benefit.

  14. Donald Pay 2013.12.28

    Here's what I think, Cory, and it's from personal experience. The law is a vast and complicated matter. If you spend enough time thinking about certain aspects of it, you can find various ways that it can be beneficial, either to clients, to yourself or to your various causes. That's the entrepreneurial aspect of law that has always interested me. It is neither good nor bad. It just is. So, that Pierce and others found this loophole and found that South Dakota tax law was set up to take maximum advantage of it is one thing.

    What makes it good or bad or morally neutral is the structure around it. Yeah, the trust task force is a morally reprehensible construct. Finding a loophole and is one thing, but not calling attention to the moral and societal issues that result from the loophole while you rake in money is moral depravity. And, the Hunhoff comment in the Bloomberg article is a real problem, also.

  15. Testor15 2013.12.28

    We were working the petition drives at the courthouse in Sioux Falls and it was amazing how many people of a certain age were getting their residency changed while they were in town. It would also be interesting to know how many of these people vote using their new South Dakota residency.

  16. Lynn G. 2013.12.28

    I've been to a few RV sites and for those who full-time in their RVs South Dakota is widely recognized as one of the top states or #1 state to set up a PO Box for residency to escape taxation and fees from other states. It seems that with the majority of this group once they gain their residency they live and spend their money elsewhere out of state.

  17. Lynn G. 2013.12.28

    I wonder if South Dakota banking will eventually become like Switzerland or a few Caribbean island nations where people can actually hide money with secrecy. So much growing secrecy in our state.

  18. jCorbin 2013.12.28

    How do all these retired folk (with SD PO boxes, but barely ever set foot in our fine state) affect our Medicare system? Which state is responsible for these snow birds when they get sick?

  19. Cranky Old Dude 2013.12.28

    An old buddy turned up years ago, flying the "Flag of Convenience" (a SD license plate) on his RV outfit. He wasn't the sort to need much of a tax shelter but the insurance on the rig was a great deal cheaper and so were the plates. This might explain (along with no income tax) why you see this situation so often in RV parks.
    He was using a PO box at a "mail drop" in Sioux Falls.

  20. owen reitzel 2013.12.28

    "I've been to a few RV sites and for those who full-time in their RVs South Dakota is widely recognized as one of the top states or #1 state to set up a PO Box for residency to escape taxation and fees from other states. It seems that with the majority of this group once they gain their residency they live and spend their money elsewhere out of state."

    I agree Lynn. What is really disgusting is that these people have no involvment in the community but get the rewards of our community and state. Like no income tax. To me these people are about as selfish as you can get.

  21. Lynn G. 2013.12.28

    Cranky I forgot to mention that important benefit too. Auto/RV insurance is much less expensive in SD also. SD is one of the least expensive states in the US to insure a vehicle.

  22. Les 2013.12.28

    And we have the banksters crying wolf over the public owned lending institutions called coop or credit unions.

  23. mikeyc, that's me! 2013.12.28


    Think about it. A person working full time at minimum
    wage pays more federal tax than the entire credit union
    Banks pay federal taxes and state franchise fees which
    go back to our local communities.

  24. Les 2013.12.28

    Credit unions pay their profits back to the consumer who then pays the taxes and spends that money into the economy. You prefer the profits leave the state?

  25. Les 2013.12.28

    BTW, link me to the info on credit unions and FCS not paying any franchise fee. Their are regulated and unregulated dollars in those organizations.

  26. Testor15 2013.12.28

    Why did this become a credit union discussion. Credit unions are member owned and controlled. What does this have to do with dynastic wealth?

  27. Les 2013.12.28

    Mike is a shill for the banks.

  28. John Tsitrian 2013.12.28

    I appreciate the distinction noted between legal and moral, Deb and Cory, but believe that "moral" is often in the eye of the beholder. Some, me included, would say that unleashing the power of those sheltered funds by keeping them out of the U.S. Treasury and investing or loaning them out, which is what happens to that money, via bonds or equity investments could very well in the long run be a better and higher use for them as they add to the pool of investment and risk capital in the private sector, especially given that the time horizon of 90 years is apparently the point where the Treasury feels the "pain" of their non-appearance.

  29. Deb Geelsdottir/ 2013.12.28

    John, I have a friend who is very good at 'bidness' deals, especially those involved in buying, upgrading and selling tourism related businesses. He needed to keep himself busy for his mental health, so I encouraged him to turn his skills to another type of venture.

    I urged him to explore various nonprofits and the ways he might use his keen business sense on their behalf. I talked to him about the opportunity to change people's lives. Imagine. Having the power to change people's lives for the better! It is mind boggling to know that we have the ability to do that! What an incredible gift!

    I told my friend that perhaps he could get involved in a local micro loan project. Or use his numerous contacts in construction to refurbish houses or commercial buildings on the cheap.

    There were so many ways he could have helped, while barely denting his pile o' money. It would have been so good for him and life changing for the people he helped. He said no, bought himself another big, new pickup, a couple more motorcycles, and spent a week in Las Vegas, helping only himself, his wife, and 2 children.

    Sad. Perfectly legal, and lacking in humanity and morality.

    Oh, he does invest via stocks, bonds, mutual funds, etc. None of that offers one single copper penny of help to the homeless woman and her 3 small children. Her husband beat her until she has a permanent limp, and terrorized the children. They escaped to the shelter in RC. Now where will she go? How will she live? What can she do for her children? They had to run with the clothes on their backs. The perp controlled all the money, no resources or assets are in her name.

    Some of those dodged taxes may have helped her. Investment capitol is meaningless to her family. John, my definition of morality points directly to the folks in greatest need. The immorality is that the USA, individually and collectively, has plenty of everything those hurting people need. There is enough good, healthy food, enough medical care, enough clothing; for those deeply wounded folks to live with dignity and have new opportunities to rebuild their lives after devastation.

    Trickle down, which you seem to be describing, is a cruel joke to them. Tax dodging is real and immediate suffering. It is immoral, top to bottom.

    [The examples I offered are true and occurred in the Hills. At one time I managed Working Against Violence, Inc., in Rapid City.]

  30. Lynn G. 2013.12.28

    mikeyc, Sorry not much sympathy from me regarding the banking industry in particular the big corporate banks. I used to have a retirement account with one of those big banks and those customer service reps are under so much pressure to sell product that they kept messing up my IRA account. After repeated attempts I transferred it to my Credit Union that I've been a member for 30 years and excellent no-nonsense service. I'm not continuously bombarded with various product sales and charged all kinds of fees from my Credit Union. That big corporate bank I pulled my account from was one of those bailed out at taxpayer expense and was fined for predatory mortage and loan practices. Too big to fail? They never should of let banks get into investments like they are today.

    Sorry I like my credit union the way it is.

  31. John Tsitrian 2013.12.28

    Hi Deb. Thanks for the nice post, which believe me, I do appreciate. My extended family and I have actually done quite a bit for WAVI here in Rapid City where we live--I'm sure you know us well. Obviously we have differing views on how to best distribute resources through society, and those differences are profound. Just the same, having come to this country as a post-war refugee and living among the poorest of the poor during the early years of my life, I have depended on the kindness of strangers--strangers like you who I've come to respect and admire. We have different approaches but a similar aim, trying to create the best possible community for ourselves and our loved ones and neighbors. I think I can see the world through your eyes and only request that you try to do the same through mine. There's a lot more coalescence than you might expect.

  32. Deb Geelsdottir/ 2013.12.28

    I appreciate your thoughtful response John.

    You are right. I'm not able to understand how money that escapes taxes still benefits people in great need. I have heard theories, yet I see those suffering folks get no relief. In fact, it keeps getting worse for them.

    I am truly skeptical, and I am truly willing to listen and learn. My knowledge is limited. I need to tell you that I have a numbers impairment. I don't know or care what it's called, but I struggle to make orderly sense of complicated equations. So if you will keep it simple, that will help me. If you don't have time for teaching I understand that too. Thanks.

  33. caheidelberger Post author | 2013.12.29

    JCorbin, the RV crowd doesn't impose Medicare costs on SD, since Medicare is federal. They could impose Medicaid costs on us, since the state provides half the funding for that program, but I'd think RVers are unlikely to be in the low-income bracket that would qualify them for that coverage.

  34. caheidelberger Post author | 2013.12.29

    Donald, you're right: Bernie's rolled yet blind eye is a problem. I can see where he might be coming from pragmatically: the dynasty trusts make us look a little bad, but they aren't doing direct damage to South Dakota's bottom line. Most South Dakotans don't notice them, and the handful of interests who would show up to fight are the powerful lawyers and bankers who would take an assault on their private little cash cow very seriously.

    But isn't that kind of elite special interest one of the big problems we have to fight?

  35. caheidelberger Post author | 2013.12.29

    Deb challenges my morality, too. I think about her bidnessman friend and his choice to buy stuff and take the family to Vegas. I compare that to my choice to spend $3 at Taco Bell last night instead of just waiting until I got home, eating leftovers, and dropping my $3 in some charity bucket. We both could have done good with our money; instead, we chose to satisfy personal pleasure. Every non-essential purchase we make could go toward meeting our obligation to help others. Where's the line where our selfish expenditures become immoral?

    Taxes help turn that complicated moral question into a somewhat clearer legal question. Each of us owes a certain amount of our wealth to the maintenance of society. The dynasty trusters and RVers who shop around for ways to pay less tax are not simply failing to be unselfish and generous; they trying to get out of the social contract. They are trying to get something for nothing.

  36. caheidelberger Post author | 2013.12.29

    Mikeyc, I'm riding with Les: if the South Dakota Bankers Association cares so much about money denied to the federal treasury by tax loopholes for credit unions, are they prepared to close the loophole on the dynasty trusts as well? The Bloomberg report cites a New York study that indicates our dynasty trusts are costing that state $150 million a year, a pittance compared to the $1.3 million the bankers claim the credit unions are shorting our state treasury. Mote... plank?

  37. Les 2013.12.29

    In no way am I defending RVers, but, it has been my experience that many of the successful of those RVers, have been ardent givers undstanding the universal dyanmics of giving in return for receiving.

  38. Les 2013.12.29

    Mikey as well as most other defenders of banks over credit unions keep ignoring the fact that credit unions turn all their profits back to the patrons. That money turns somewhere between 1 and the proverbial 7 times in a community with 20 different taxes from tobacco, alcohol, sales etc paid.
    Bank profits go to a very small unique group who does not spend into the community like the patron who spends every nickel of the patron capital rotation.
    There is also regulated or unregulated monies that CU franchise fees are paid on. They also pay income tax on any dollars not allocated back to the patrons. You are no more than a shill or an uneducated shill for the bankers Mikey.

  39. Deb Geelsdottir/ 2013.12.29

    I defend credit unions too. Wells Fargo pushed me into bankruptcy when the Great Recession destroyed my job, pension, life insurance, savings, etc. I was hanging on by my fingernails, working as hard as I could. WF did not hesitate to throw me over the edge.

    I'm at a credit union again, 3rd time in my life. They do everything they can to "help" me. Low loan interest rates, no gimmicks, fees, charges. It is exactly what they say it is. That's been my experience at every credit union. They are part of the community, where they live, invest, involve, etc. No remote corporate headquarters and ultra-wealthy corporate brass.

    My money will never see the inside of a bank again.

  40. interested party 2013.12.30

    Someone go tell PP that Hani Shafai and DD have been sharing the Children's Home Society bed for at least a decade. Barking up the wrong tree only serves to embarrass his stupid party.

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