South Dakota, World-Class Tax Haven

Back in 2013, when this blog saluted Sioux City’s street of trust companies, South Dakota seemed an unlikely addition to the list of states that promote upscale financial services by offering to keep family assets safe in trusts – trusts that can last a long, long time. 

Now the Pandora papers reveal that South Dakota has become a world class, $367 billion tax haven. Handsome office buildings have replaced the old mail-drop trust offices.

Who ever imagined that South Dakota would one day be compared to Switzerland and the Cayman Islands?

The Dead Hand Lives On

From the WSJ: Dynasty Trusts Make Sense for Certain Wealthy Families.

Weren't the really rich turning toward philanthropy rather than endless wealth preservation? Not entirely. Perhaps hopes for estate tax repeal are fading along with the Republican presidential campaign.

The NY Times Looks at Wealth-Shielding Trusts

Nevada is the star of this Times story. Here in New Hampshire, we resent being called a "wannabe" in the wealth-sheltering business.

Comments on the article are mostly unkind to the 1%. Yet as one commentator observed, there's little reason for jealousy: 

"I don't know too many happy wealthy people or lawyers, and I know a lot of wealthy people and lawyers."

"The Secret of Wealth"

For no good reason (maybe Siri's looking for a more luxurious lifestyle) my iPad presented me with the results of searching this blog for "the secret of wealth." The posts are worth revisiting. You can read them here.

For those considering dynasty trusts as well as the rest of us, the "secret" is clear: Families can enjoy lasting wealth only if it's replenished from time to time.

Proliferating Trusts . . . Bulletproof Trustees

Thanks to Gerry Beyer for calling attention to Adam Hofri-Winogradow's survey of trusts around the world.

"More than ever before," Hofri states, "the trust is now heavily used across most of the globe as a key means for individual and family wealth planning...."

Unsurprisingly, the survey finds that dynasty trusts, designed to last more than a century if not forever, have surged in popularity. But "forever" may prove theoretical. A significant proportion of such trusts may run no longer than conventional generation-skipping arrangements, thanks to children or grandchildren armed with powers of appointment. 

U.S.-based trusts stand out from the global pack in a couple of ways: Greater emphasis on protecting beneficiaries from creditors, and a greater determination on the part of U.S. grantors to keep a degree of control over what they give away.

Until the last generation or two, generally trust beneficiaries could seek legal relief if they suffered losses due to the trustee's negligence. No longer. When the wealthy create trusts they are routinely expected to accept exculpation clauses that shield trustees from liability.  It appears, Hofri-Winogradow finds, "that exculpatory terms, without settlors receiving any quid-pro-quo for their inclusion, are now a conventional, nearly universal standard in donative trusts serviced by professionals. "

(He has enlarged on the theme of vanishing protections for beneficiaries in The Stripping of the Trust.)

Is legislation desirable to roll back the exculpatory tide? Or should the trend be welcomed if it shields trustees from beneficiaries who expect them to adhere to  the Will Rogers Rule of Investing?

You remember the Rule:

Buy stocks that go up. If they don't go up, don't buy them.

Will Robo Advisers Have Cyborg Clients?

Within 200 years wealthy humans will have become godlike cyber-organisms. So predicts Yuval Noah Harari, a professor at the Hebrew University of Jerusalem,

Our cyborg descendants, says Harari, "will be as different from today’s humans as chimps are now from us." Presumably their lifespans will become more or less infinite.

Well, there goes the dynasty trust market.

Dynasty Trusts? The New Money Has Doubts

David G. Klein

Although this WSJ Wealth Adviser column points out several ways to make dynasty trusts flexible, "forever trusts"seem like a hard sell to first-generation wealth:

Financial advisers and estate-planning professionals say many of their clients feel uncertain about the kind of world their heirs will inhabit…. These concerns are making it hard to steer estate-planning conversations beyond simply the next generation to thinking many decades, or even centuries, down the line….

*** 

Add in uncertainty about what the family will look like, and what kind of tax rules and other financial issues they will face…. It can make recommending… handing assets over to a dynasty trust…very tricky.

For those who can predict the estate tax rules that will be in place in 2115, perhaps dynasty trusts make sense. But if all possible flexibility (trust protectors, decanting, powers of appointment, etc.) is built into a trust, hasn't its creator essentially relinquished control over his or her "legacy"?

Because dynasty trusts represent advanced estate planning, they tend to be paired with sophisticated investment strategies. Good idea? Maybe not. Preston McSwain explains why Yale's David Swensen believes family funds should not be invested like a tax-free university endowment.

Are Perpetual Trusts Unconstitutional?

Scene: divorce court.

Husband's lawyer: In the interests of a swift settlement, my client wants to be more than fair. He's willing to give his wife half his net worth of one billion.

Wife's lawyer: Not so fast. What about his other billion, the one he put into that out-of-state perpetual trust?

Judge: Interesting point. Since our state doesn't recognize forever trusts, I'm including the value of the trust in his net worth. That brings his total wealth to two billion. How does "One billion for her, one for him" sound to you?

•

Paul Sullivan devotes this week's Wealth Matters column to perpetual trusts. According to Robert H. Sitkoff, a professor at Harvard Law School, some may prove vulnerable to angry spouses or greedy descendants.

Dynasty Trusts: Rename or Remarket?

Have you noticed? The trade name for very long-term family trusts seems to be changing from Dynasty Trusts to Legacy Trusts.

"Dynasty," it seems, reminds too many Boomers of the old prime-time TV soap opera, best remembered for Joan Collins' performance as Blake Carrington's evil ex wife. The Carringtons were hardly exemplars of family values.

The current TV hit, Duck Dynasty, doesn't help either. Too much hair.

Unfortunately, "Legacy Trusts" is an awkward substitute. The label could be attached to any trust extending beyond a trustor's lifetime. Besides, financial marketers have already borrowed "legacy" to stand for the handing down of family values: work hard…be kind…never draw to an inside straight.

Joan Collins

Nefertiti

Wouldn't it be better to reburnish the luster of Dynasty Trusts? 

How can we make the name evoke less Joan Collins, more Queen Nefertiti?

Brother, Can You Spare $10 Million?

Bloomberg seems worried: Rich Passing Up $10 million Opportunity to Gift Tax-Free. According to one survey of CPAs, fewer than 10 percent of people with $10 million or more have used any of their federal gift tax exemption or plan to do so.

As the Bloomberg report indicates, the generous gift-tax exemption now available can be helpful to owners of exceptionally valuable family businesses. Otherwise, the aversion to massive gifting is understandable. Folks with $20 million or $30 million could see their net worth plummet if the Great Global Deleveraging ends badly; they don't feel they have a lot of wealth to spare. As Bloomberg notes, those with $100 million or more are likelier candidates for gifting.

Billionaires are the best bet. My State, New Hampshire, is among those seeking to attract their trust business. Glad to learn that one NH trust company has picked up six billionaire clients in the last couple of years.

Last year Mary Rowland reported on New Hampshire trusts, as well as family-office developments,  in Keeping Family Trust.

How Long Can a Perpetual Trust Last?

How many descendants of your great-great-great-grandparents do you know? Half? A handful? A few? (Personally, I've never met most of my first cousins.)

As more states ease or discard the rule against perpetuities, family trusts are being set up to last for a thousand years or even "forever." Doesn't that stretch the definition of family to the breaking point?

Yes, according to Lawrence W. Waggoner of the University of Michigan Law School.

"Trusts intended to operate for as many as a thousand years or even in perpetuity, typically for the benefit of the settlor’s descendants living from time to time, now and in the future, are all the rage in banking and some estate planning circles," Waggoner writes. In From Here to Eternity, the Folly of Perpetual Trusts, he does the math showing the absurd consequences.

 He shouldn't worry. As life beneficiaries of a "perpetual" trust proliferate from generation to generation, the value of what each beneficiary receives will dwindle, eventually prompting the trust to distribute the few crumbs remaining and terminate. Centuries ago this inevitability was explained by Oliver Wendell Holmes: A great fortune will split "into four handsome properties; each of these into four good inheritances; these, again, into scanty competences…."

Perpetual trusts cannot generate perpetual wealth for heirs whose number multiplies with each generation. In Holmes' day New Englanders knew as much. The secret of perpetual wealth is that each generation must rebuild that wealth.

Pot Trusts

Paying Grandkids' College Bill in the WSJ includes a plug for "pot trusts" from estate planner Jessica Galligan Goldsmith:

… Ms. Goldsmith is seeing more grandparents turning their attention to college funding for grandchildren who are mere toddlers—or who aren't even born yet. In that case, trusts earmarked for education expenses may better meet a family's goals, she says, since the grandchildren may not reach college age until after the grandparents die. 

In families with multiple grandchildren and the potential for more, Ms. Goldsmith often recommends setting up a "pot trust," or dynasty trust, which names all of the grandchildren, including any future babies, as beneficiaries. The length of such a trust varies by state but generally can serve at least a few generations of college students.

(Yes, Boomers, your kids are lucky that God invented grandparents.)

A Dynasty Trust for Dubya and Barack?

From Curtailing Dead-Hand Control: The American Law Institute Declares the Perpetual-Trust Movement Ill Advised:

If Samuel Hinckley, who died in Massachusetts in 1662, had created a perpetual or a near-perpetual trust for his descendants, the more-than-100,000 beneficiaries living in 2010 would include President Barack Obama and his descendants and former President George H.W. Bush and his descendants (including former President George W. Bush).

H/T to the Wills, Trusts and Estates Prof for calling attention to this paper.

Related post: Return of the Dead Hand

Trust Co's Trek to South Dakota

Time was, the State of Delaware reigned as the trust site of choice for those seeking asset protection. According to RBC, over 40 of the Forbes 400 have Delaware trusts.

Now South Dakota and other states are getting into the act, as The Wall Street Journal (subscription) noted recently.

About half a dozen states are actively vying to attract wealthy families' trusts, as well as the jobs and tax revenue that come from the companies that administer these estate-planning vehicles.

States such as Alaska, Delaware, Nevada, New Hampshire, South Dakota and Wyoming have modified their trust laws in recent years to make them more attractive to individuals and families, including nonresidents, looking to minimize taxes, shield assets from creditors and preserve family assets in the event of a divorce, among other things.

"Between 1985 and 2003," according to one study, "some $100 billion—about 10% of reported trust assets held by federally regulated financial institutions—moved to states that allowed long-term trusts and didn't tax trusts created by nonresidents."

More recently, the trust-company battle cry seems to be "South Dakota or Bust!" Trust Advisor points out that this "tax-friendly asset protection jurisdiction" also draws fiduciary start-ups by means of lenient capital requirements. "A new company only needs to post $200,000 for a South Dakota charter, versus up to $1 million elsewhere."

Will a handful of states end up hosting the lion's share of dynastic and asset-protection trusts?

Will Citibank's most celebrated South Dakota employee decide to switch to a new, fiduciary career?

Should Wealth be Perpetual?

In 19th-century New England, the secret of perpetual wealth was to live way, way below your means. The 21st-century secret of perpetual wealth is a dynasty trust. These trusts, designed to preserve family wealth in perpetuity, pose a "pernicious problem," writes Ray D. Madoff in America Builds an Aristocracy.

Related posts:
Return of the Dead Hand
The Secret of Perpetual Wealth