How South Dakota became the “Bermuda of the prairie”

Is your multi-million dollar trust in a state with a corn palace like this one?
Is your multi-million dollar trust in a state with a corn palace like this one?
Image: AP Photo/Meyer Scherer & Rockcastle
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It’s not a coincidence that places marked by strenuous efforts to attract outside money by abandoning any pretense of taxation or transparency are often small, with small populations.

They are tiny European states (Malta, Lichtenstein, Luxembourg) and offshore islands (Jersey, the Caymans, Bermuda) and the least-populated US states (Delaware and South Dakota, which each have fewer than one million residents).

That’s because it’s easier for financial interests to capture a smaller government and for societies to clamp down on those that wonder if the deal is really all that good for them, as chronicled extensively by the journalist Nicholas Shaxson. You often find figures like Feargal O’Rourke, the Irish tax lobbyist for offshore interests who is plugged into Ireland’s insular political class as the son of a former prime minister and cousin to a recent finance minister.

Today, Bloomberg found such a man in South Dakota: Pierce H. McDowell III, president of the South Dakota Trust Co., which manages $15 billion in client accounts directly and provides South Dakota addresses and advice to trusts worth an additional $75 billion. (There are $121 billion in trust assets in the whole state.) That’s a lot of money for a place where real GDP last year was $35 billion.

Most recently, McDowell and his crew persuaded the state legislature to pass laws that make it harder for the former spouses of wealthy people and their children to access assets hidden in South Dakota. That’s just the gravy, however, on  laws that attract everyone from the billionaire Pritzker family to the heirs to the Wrigley fortune: They exempt dynastic trusts from federal inheritance taxes and income taxes, allowing generations of heirs to collect money tax-free. South Dakota was one of the first states to make such a law, but now almost a dozen others are following it in a race to the bottom.

Is it worth it? The South Dakotans cite around a hundred jobs created by the trust industry, and figure that’s enough. But the state is also a net taker from the federal government, which supplies almost half its budget, even as its trusts drain perhaps billions of dollars from federal coffers and hundreds of millions from states where the beneficiaries of these trusts actually live.