Big US tax havens – The new Switzerland?

IN an old discount store hugging a corner in downtown Sioux Falls, South Dakota, the heirs to the William Wrigley chewing gum fortune have an office for their family trust. So do the Carlson family, owners of the Radisson hotel chain, and the family of John Nash, the late hedge fund giant.

They are among the 40 trust companies sharing an address at 201 South Phillips Avenue, a modest, two-storey white-brick building. Inside, $80bn worth of trust assets are administered.

Yet despite its small town feel, Sioux Falls has become a magnet for the ultra-wealthy who set up trusts to protect their fortunes from taxes and future ex-spouses. Assets held in South Dakotan trusts have grown from $32.8bn in 2006 to more than $226bn in 2014, according to the state’s division of banking. The number of trust companies has jumped from 20 in 2006 to 86 this year.

The state’s role as a prairie tax haven has gained unwanted attention since the release of the Panama Papers, an investigation by the International Consortium of Investigative Journalists. The leak of more than 11m documents from a Panamanian law firm – some of which have been put on to a public database – has drawn attention to the anonymity that is available in the US.

After years of threatening Swiss and other foreign banks that helped Americans hide their money, the US stands accused of providing similar services for the rest of the world. ‘America is the new Switzerland,’ says David Wilson, partner of Schellenberg Wittmer, a Swiss law firm. “In the industry we have known this for several years.”

After pursuing Swiss banks for helping Americans hide money, the US has become a magnet for offshore wealth

The US has a long history of attracting funds from undisclosed foreign sources. In 2011, The Florida Bankers Association told Congress there were hundreds of billions of foreign deposits in US banks because ‘for more than 90 years the US government has encouraged foreigners to put their money in US banks by exempting these deposits from taxes and reporting’.

The Boston Consulting Group estimates that there is $800bn of offshore wealth in the US, nearly half of which comes from Latin America. That puts it well behind Switzerland’s $2.7tn, but it is expected to grow at nearly 6pc a year – faster than any rival except Hong Kong and Singapore.

Bruce Zagaris, a Washington-based lawyer at Berliner, Corcoran & Rowe, says the US offshore industry is even bigger than people realise. “I think the US is already the world’s largest offshore centre. It has done a real good job disabling competition from Swiss banks.”

The growth has been fuelled by international disclosure rules introduced in 2014 to crack down on tax havens – and adopted almost everywhere except the US, which had introduced its own regulations. But these rules have gaps that preserved the advantages of trusts such as the ones on offer in South Dakota. Rules proposed by the White House earlier this month to force companies to disclose more information about their owners are unlikely to erode those advantages.

Trusts are able to avoid scrutiny under both US and international rules as long as the owner appoints a local trustee and a foreign ‘protector’ to direct the trustees. South Dakotan companies actively promote the secrecy offered by opening a trust in the state.

“Many of the offshore jurisdictions are becoming less appealing for international families looking for secrecy”, says the website of the South Dakota Trust Company, one of the most prominent. “Consequently, the stability of the US combined with its modern trust laws … may be more appealing to many international families than an offshore trust based in a less powerful country.”

With no personal or corporate income tax, no limit on ‘dynasty trusts’ and strong asset protection laws – shielding assets from soon-to-be ex-spouses – South Dakota has leapt to the top of annual rankings for the trust industry. Nevada, Delaware and Alaska also compete for accounts.

South Dakota’s inviting legal environment can be traced to the ground floor of the old discount store on Phillips Avenue. Upstairs is the corner office of Pierce McDowell III.

Mr McDowell has been an evangelist for South Dakota for almost 25 years. In 1993 he wrote an article for Trusts and Estates magazine. In South Dakota, he said, families could employ ‘the same strategy used by the Rockefellers and the Vanderbilts for generations to avoid estate tax’.

The article caught the eye of Al King, then director of Citibank’s trust division in New York, and he recruited Mr McDowell to run the bank’s South Dakota office. The combination of Mr King’s legal contacts and Mr McDowell’s local knowledge catapulted the business. In 2002 the pair struck out on their own, forming SDTC with Mr McDowell in Sioux Falls and Mr King in New York.

The firm does not manage money. They help private trusts meet state requirements, such as having someone in the state serve as a director, establishing office space and carrying out administrative work within state lines. Trust companies are required to have two board meetings a year in the state. Annual fees start at $35,000 ‘on the low end’ and go up.

Aspects of the trust industry attracted criticism. States like New York complained about the loss of billions of dollars in business to trust-friendly states as well as the leakage of income tax, which it estimated at $150m in 2013.

Some analysts question whether the state receives enough from the benefits it provides. In the 2015 fiscal year, South Dakota collected $1.79m from trust companies. The legislature passed a $4.3bn state budget last year.

Andy Holmes relocated from Kansas City last year to help his firm, the Great Plains Trust Company, increase its presence in South Dakota after clients, including celebrities and famous athletes, asked about the state’s benefits.

Mr Holmes estimates that 90pc of the registered trusts in the state ‘are what I call shell companies where you basically have a PO box or an office and somebody will come here twice a year to have board meetings and meet regulatory requirements. But there’s nobody here with feet on the ground to serve Sioux Falls. We’re trying to take advantage of that’.

For now, the biggest challenge for the industry, Mr McDowell says, is criticism of the secrecy it can offer. “So much that has been written about this stuff appears to be so sinister,” he says. “All of these tax laws are there for a reason. It’s not about tax dodging, it’s planning.”

Bret Afdahl, director of the state’s banking division, says the requirements to qualify for a trust have increased, such as having more of a physical presence. Applicants are often turned away.