Several US states – including South Dakota, Delaware, Nevada, and New Hampshire – have become popular places for the wealthy to park billions of dollars in secret. South Dakota, for example, has more than 100 trust companies that manage $ 367 billion in assets, up from $ 75 billion in 2011.
Over the past week, media reported on a series of leaked documents known as the Pandora Papers, which showed how wealthy foreigners were using these U.S. destinations to hide their assets from authorities, creditors and the public.
The International Consortium of Investigative Journalists has shared its wealth of financial data, made up of more than 11.9 million files, with hundreds of journalists from different media.
In 2016, a similar leak known as Panama Papers revealed how the former Panamanian law firm Mossack Fonseca helped high net worth clients launder money and avoid taxes.
Exemptions from reporting
The United States is unique in allowing for shareholder secrecy, which makes the United States an attractive place to invest foreign money, said Adam H. Rosenzweig, professor of law at the University of Washington in St. Louis.
He explained that a company does not have to list all of its shareholders and a trust does not necessarily have to list all of its shareholders.
The Organization for Economic Co-operation and Development, an intergovernmental economic organization, developed the Common Reporting Standard in 2010. It calls on “jurisdictions to obtain information from their financial institution and to automatically exchange this information with other jurisdictions on an annual basis ”. More than 100 countries have registered to use the CRS, including the European Union, China and Russia.
However, the United States is not part of the common reporting standard, said William Byrnes, professor of law at Texas A&M University. (On the other hand, in 2010, the Foreign Account Tax Compliance Act came into effect. This US law requires foreign financial institutions to report foreign assets held by US account holders.)
On top of that, some states have lenient rules when it comes to assets and taxes in the first place. Stewart Sterk, a professor at Yeshiva University’s Cardoza Law School, said the laws were made with the aim of attracting businesses to the region.
“Most of the ways to attract business have been to protect assets on the one hand, lower taxes in general on the other hand, and abolish the rule against perpetuities,” Sterk said.
Sustainable inheritances that are not taxed
In 1983, South Dakota officially repealed the rule against perpetuity, which had been established to prevent inheritance.
This rule, which originated in England, allows you to pass assets on to your children through a trust and defer inheritance taxes – but only for a certain time, Rosenzweig explained. Typically, this ceiling is set at 21 years.
By getting rid of this rule, South Dakota allowed trusts to exist indefinitely.
“We’re back in almost a pre-revolution, English common law, where there are hereditary estates, and once they’re in a family, [you] can put it in a trust that lasts forever, ”Rosenzweig said. “And because he never leaves the trust, he cannot be bought or sold. But also, it is never taxed.
South Dakota has been pushing for this, along with other changes to the law, in an attempt to attract banking positions to the region, Sterk explained.
In a law review article, Sterk wrote that prior to 1983, the state also repealed an interest rate cap on consumer credit cards, which brought Citibank’s credit card business in the state.
“In fact, they have been reasonably successful in attracting banking business in general,” Sterk noted.
Laws on beneficial trusts and intangible assets
Byrnes noted that some areas have asset protection trusts, which are recognized in more than a dozen states, including South Dakota and Delaware.
These trusts protect a person’s assets from creditors and can provide protection in the event of divorce or bankruptcy.
And other states considered tax shelters, such as Delaware, generally have more lenient regulations.
Delaware does not levy taxes on state or local sales, or on income from “intangible assets,” which includes software, licenses, trademarks, patents, and copyrights. This means that a company can set up its headquarters there, without having to pay intellectual property taxes.
Sterk said Delaware corporate law is also designed to attract business.
“Delaware’s success has been a boon to local law firms and to the treasury,” he said.