Why Billionaires Love to Park Their Dynastic Wealth in Places Like South Dakota

Billionaires love South Dakota, a sparsely-populated state with a population of 884,000.

If you want to understand how U.S. billionaires are able to pay so little taxes, as exposed by this June 2021 ProPublica report, look to the Mount Rushmore state.

Lawmakers should act at the federal level to shut down or discourage the formation of dynasty trusts and GRATs for the purposes of tax avoidance and dynastic succession.

One tool that wealth advisors to the rich deploy is called a "dynasty trust."

A dynasty trust is a form of trust that is designed to sequester wealth for longer than ordinary trusts--sometimes for centuries or forever. These trusts are often formed in U.S. states--such as South Dakota--that have suspended or altered their state "rule against perpetuities," legislation that previously limited the lifespan of a trust. (For the full wonky version see this background brief that I co-authored about dynasty trusts.)

In the 1980s, South Dakota changed its laws to attract wealthy people looking to park their money in trusts (they did the same thing to attract the credit card industry). A few other states followed suit, such as Wyoming and Alaska. Today, a private trust industry flourishes in the South Dakota, helping billionaires hoard their wealth.

Over the last several decades, South Dakota's trust industry has attracted dynastically wealthy families to form "dynasty trusts" including the Chicago Pritzker family (Hyatt hotels), the Minnesota Carlsons (Radisson Hotels), the Wrigley family (heirs of chewing gum magnate William Wrigley), and others.

In my book, The Wealth Hoarders: How Billionaires Spend Millions to Hide Trillions, I describe how the wealth defense industry deploys dynasty trusts to enable ultra-high net worth individuals--those with $30 million or more--to systematically avoid wealth transfer taxes--that is, estate, gift, and generation-skipping taxes. A recent expose by ProPublica revealed how the super-wealthy also deploy "Granter Retained Annuity Trusts" (GRATs) and other loopholes to shield their wealth. Billionaires will often deploy both methods to aggressively avoid taxes.

Because the super-wealthy are avoiding or reducing their taxes, they are shifting the obligations to pay for society's investments onto lower and middle-income households. Dynasty trusts also entrench existing levels of wealth inequality and facilitate the formation of dynastic concentrations of hereditary wealth and power.

Lawmakers should act at the federal level to shut down or discourage the formation of dynasty trusts and GRATs for the purposes of tax avoidance and dynastic succession. Actions could include the passage of a federal "rule against perpetuities," banning certain trust arrangements, and taxing income and wealth in trusts.

Congress is debating federal tax policies, including reforming the estate tax and taxing billionaires. But they won't succeed if the super-rich can park their wealth in South Dakota dynasty trusts.

To learn more, read the full IPS Policy Brief: "Dynasty Trusts: How the Wealthy Shield Trillions from Taxation Onshore," by Kalena Thomhave and Chuck Collins.