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Trust Task Force Prof Writing Hard to Defuse Pandora Papers, Defend Rich, Deflect Criticism

There’s a guest column down here somewhere…

The release of the Pandora Papers and the resulting press coverage of South Dakota’s central role in facilitating global corruption and wealth concentration as apparently inspired the one academic on South Dakota’s Task Force on Trust Administration Review and Reform, Thomas Simmons* of the USD Law School, to write a lot of essays attempting to tamp down furor against the industry in whose regulatory capture he participates.

On Thursday, he wrote for the SDGOP spin blog that the Pandora Papers have produced a lot of puff but not much solid point. Professor Simmons suggested that the fact that some bad actors have used trusts isn’t much bigger of a deal than the fact that some regular folks have held stock in some malfeasant companies, like Volkswagen and Wells Fargo. (Dang—I drove a Volkswagen, and I got my mortgage and had a checking account with Wells Fargo, so I guess letting rich folks sequester their money secretly and forever in South Dakota is nothing to worry about.)

Today he placed a similar dismissal, or at least diminution, of the Pandora Papers in the South Dakota Standard, referring to “perceived flaws” and “troubles… too-often overstated or inadequately supported” by the press. Simmons commends commentators like the Standard’s John Tsitrian who are using the Pandora Papers to open sincere policy discussions, but Simmons chides those who “disparage the wealthy and deprecate those who do business with the rich” and tells us to knock off our Red-China Communism:

Wealth itself is being equated with criminality and corruption, implying that individuals with wealth lack all legitimacy; that the wealthy owner has less of a claim to his chateau than the man who resides in an ordinary townhouse.

That kind of thinking is not too far removed from the treatment of landlords during China’s Cultural Revolution. Landlords were hated, mistreated, and reeducated because having wealth was itself a reprehensible act which rendered its owner an outcast. If we criticize wealthy individuals who utilize trusts on the basis of their wealth, it’s just another small step to criticize the trust companies as collaborators in the maintenance, management, and preservation of wealth. And that is exactly what is going on [Tom Simmons, “The Pandora Papers Have Generated Intense Scrutiny of S.D.’s Trust Industry. Isi It a Thunderclap or Balderdash?South Dakota Standard, 2021.10.10].

So when Simmons popped into my inbox this weekend seeking some space for his thoughts on Dakota Free Press, I thought, what, he’s already had his say on the spin blog and one decent blog; does he really need to repeat himself here?

But I looked at the essay he submitted to DFP, and son of a gun, it was a whole nother original essay. The thesis and, I suspect, the intent are similar: acknowledge the presence of a few bad actors requiring reasonable regulation, but then deflect to talk about bad people saying bad things about the good people in the good trust industry. And just in case his defense of rich people doesn’t get the public off the trust industry’s back, Simmons cleverly redirects his defense to make it sound like the people criticizing trusts are attacking the all the good people of South Dakota.

Here is Simmons’s clever submission to Dakota Free Press in full:

The Pandora Papers represent more than a thousand 26-volume encyclopedia sets worth of financial records, more than would fit within most small-town libraries in South Dakota. No one should be surprised that they reveal a handful of bad actors with corporations and trusts – along with ordinary bank accounts and safe deposit boxes – holding some of their illicit loot. And some of it appears to have made it into accounts managed by individuals working in South Dakota.

The great majority of trust administration does not involve the profits of criminal enterprises. Still, even just a few bad actors are a concern. I think that even the most hardened anti-regulation conservatives (myself, included) have been given some cause for pause and started to wonder if the trust industry might benefit from additional layers of reasonable government oversight and thoughtful regulation.

Modifiers like “reasonable” and “thoughtful” (or “moderate” and “cautious”) might be perceived as bywords for opposing any regulation whatsoever. I suppose from some, that might be the case. But personally, I think moderation is a pretty judicious approach to things quite a lot of the time. Moderation can generate effective policy outcomes much more often than extreme positions.

The two-party system tends to suggest that there are only two ways of looking at the world, that the middle ground is a no man’s land between the trenches where no one can survive for long. When political discourse is polarized, sadly, that can be the case. But the moderate view on any particular issue is oftentimes a responsible way of looking at a problem. And it may be heresy, but both parties have been wrong from time to time. They’ve even been both wrong about the same issue.

Perhaps the greatest harm of our two-party system is that it encourages even intelligent and engaged citizens to turn off their thinking caps and simply get in step behind their party leaders. And before you know it, everyone’s goose-stepping.

An example of this kind of thoughtlessness was on view in The New Republic a few days ago.

Timothy Noah published an editorial titled South Dakota Is a Moral Sewer and Should Be Abolished. You might think the title is just a bit of hyperbole meant to draw in readers. You’d be wrong. Noah describes South Dakota as “a make-believe state devoted to the preservation of wealth dynasties.” Indeed, he says, it’s an “imposter of a state.” And, he concludes – “it should just go away.”

He’s serious.

Article IV of the United States Constitution grants to Congress the power to admit new states. By extension, Noah reasons, Congress must also have the plenary power to abolish states when they become tiresome: “If Congress has the power under the admissions clause to admit new states, shouldn’t it also have the power to dissolve them? Everybody makes mistakes!”

Given the problems that the Pandora Papers have brought to life, Noah argues, a quick response is called for: “We’ve put up with this moral sewage long enough. Let’s abolish South Dakota by merging it into North Dakota.”

Hold on for just a second. That was a pretty quick pivot from trust-busting to state-busting, wasn’t it?

The lawyer in me also requires that I note the actual text of section 3 of Article IV of the Constitution. It says:

New States may be admitted by the Congress into this Union; but no new State shall be formed or erected within the Jurisdiction of any other State; nor any State be formed by the Junction of two or more States…

If Noah genuinely wondered about the implied power of Congress to form a new state by the junction of North Dakota and South Dakota, he need only have paid attention long enough to finish reading the clause.

Flesh and blood human beings live in this state. We don’t all see eye-to-eye on every issue. Lately, it seems, we’ve been talking over one another too much – and talking to one another far too little. Critics of trusts can forget that uber-wealthy individuals are still people. And the people that I know who work in banks and trust companies in our state are people, too.

When Timothy Noah squints at us, he doesn’t see South Dakotans. He just sees “77,000 square miles of undead family fortunes.”

We’re a fly-over state. So, from the air it’s hard to make out all of the individual people and their families peppering the landscape. But we’re here [Dr. Thomas E. Simmons, “Pandora-Painting with Too Broad a Brush—or—Too Much Trust-Busting?” guest column to Dakota Free Press, received 2021.10.09].

[As a Regental employee, Dr. Simmons also has to remind us, “Views or opinions Professor Simmons expresses on judicial decisions, pending legislation or any other public or private matter are his views as an individual and do not reflect the views of the University of South Dakota, its Knudson School of Law, their employees, faculty or administrators.”

Drug dealers, dictators, and other dastardly-deed-doers are using the laws Simmons helps write for South Dakota to hide their money from taxes, creditors, and courts, but if you criticize South Dakota’s trust companies and the whole concept of letting the rich forever hoard their wealth, you are the real dehumanizing devil who would deny South Dakotans not just wealth but identity and statehood.

Winter is coming—get ready for more snow jobs from South Dakota’s trust industry and its scribes.

*Correction 2021.10.12 13:20 CDT: I originally referred to Simmons as “Dr. Simmons.” The law professor mentions that he does not have a doctorate, just a law degree, and thus eschews that title.

64 Comments

  1. grudznick 2021-10-10

    Trust funds. Probably not your money. So mind your own business.

  2. Eve Fisher 2021-10-10

    I’ve noticed that a lot of people are coming out of the woodwork to defend the shelf corporations / “trust funds” business, and complaining that we’re all demonizing the wealthy. No, we’re stating the obvious point that this is all technically illegal on a global scale, but here in South Dakota, we’ve decided we can have whatever laws we want – such as anti-usury! Perpetual trusts! Complete privacy! No transparency!
    Makes me wonder how much of a taste Professor Simmons has been given to help write the laws…
    Meanwhile, Sioux Falls’ own T. Denny Sanford is living proof that you can’t make billions cleanly. His predatory credit cards screwed the poor for decades in this state, left them with forever ruined credit, & now he’s giving away money left and right – to quote Bill Cosby (deliberately) “just another old man trying to get into heaven.” Just as long as he gets his name on everything. Except whatever trust(s) HIS money is in.

  3. grudznick 2021-10-10

    Ms. Fisher, people shouldn’t buy stuff if they can’t afford the bills. The obvious result is bad credit. Nobody made those people make stupid decisions. They need to get out and work harder.

  4. Mark Anderson 2021-10-10

    Oh grudz, the Republican party after feasting for years has now said they won’t pay the bill. They want the Democrats to pay it.. Your boys, everyone one of them. They leave lousy tips anyway.

  5. Nick Nemec 2021-10-10

    Dr. Simmons engages in a standard tactic from the GOP playbook. Find some obscure writer who suggests an extreme solution to a problem, make them into a boogieman and ascribe their position to everyone on the other side. We have seen this tactic before, we will see it again.

  6. O 2021-10-10

    Speaking of demonizing the wealthy, it was the Catholic Pope, not Red China, that called obscene wealth a sin. The magnitude of the wealth accumulations of the wealthy all too often gets washed away in any discussion of morality. When trusts have to be set up to protect inheritances — inheritances that are untaxed to $11,700,000.00 — our very ability to conceptualize the scope of wealth is put to the test. Now it is expected that Jeff Bezos will become a trillionaire (a word that spellcheck does not even recognize) by 2026. The wealth disparity gap becomes ever more concentrated BECAUSE of policies. This concentration of wealth poses a real threat to our nation. Still the most common way to become one of America’s most wealthy is inheritance, so even the boot-strap self-made man is NOT the wealthy success story for most of the wealth hoarders. Even a previous post points out SD’s own T. Denny Sanford cannot give away his money faster than it accumulates.

    I say it is time to end the worship of the rich and stop aiding and abetting their warehousing of wealth through policy.

  7. grudznick 2021-10-10

    Uncle Joe will just print us all more money. It’s ok, people. Stop worrying about what others have.

  8. O 2021-10-10

    Wealth is a zero-sum game. Unfortunately, grudznick’s plea has been the pathway for policy promoting the wealthy to actively remove the wealth from everyone else. What others have IS what they have taken from you.

  9. ArloBlundt 2021-10-10

    well…we are living in the new gilded age…and we don’t have Teddy Roosevelt around to break up the trusts.

  10. Porter Lansing 2021-10-10

    If SD trust laws allow criminals to shelter money, that has nothing to do with protecting a grandmother, who’s not a criminal’s, wealth.
    Using one instance to justify the other is a false equivalency.
    The usury and perpetuity laws of SD are a crime within themselves.

  11. ArloBlundt 2021-10-10

    And I would add…the fiscal conservatives lament…”but we don’t have any money”.

  12. DaveFN 2021-10-11

    “Alex Cobham, an economist and chief executive of the Tax Justice Network, said the “personal actions” of some of the people named the Pandora Papers investigation are “shameful,” but it is “important that we don’t lose sight of one crucial fact: few of the individuals had any role in turning the global tax system into an ATM for the superrich. That honor goes to the professional enablers — banks, law firms and accountants — and the countries that facilitate them.”

    He said that the “biggest blockers to transparency” are the U.S. and the U.K., which is “the leader of the world’s biggest tax haven network. We need full transparency so we can hold tax abusers accountable, especially when our politicians are among them.”

    https://www.icij.org/investigations/pandora-papers/governments-vow-investigations-within-hours-of-pandora-papers-revelations/

  13. happy camper 2021-10-11

    Fascinating he thought he would or might get cooperation from DFP. I don’t think he knew his audience or was being overly hopeful, but John Tsitrian is much more business friendly than Cory before he veers off to the left in more inconsistent ways than Cory. John made his money in the markets and was probably around big money people. Simmons is right though that most South Dakotans probably have no idea this industry is taking advantage of our laws. It’s worth remembering the electorate voted for protective measures against the most egregious Pay Day Lending practices so don’t blame it on the people of the state that our laws were crafted to create a business opportunity that should be up for public debate. Do we want to benefit from stolen money, drug money, or what is illegal in these people’s home state or country? Seems to me our laws could be tightened up to eliminate the worst offenders. The conservatives in the legislature like to see themselves as god-fearing but they’re not consistent either. They talk the talk but that’s about it. What would Jesus do? Even if you’re atheist or agnostic that’s not a bad question to ask what most of us learned from being raised in the church is a pretty good guide for everyday life.

  14. larry kurtz 2021-10-11

    Culture of corruption or just relativism?

    South Dakota doesn’t have a racketeering law or statute so the feds will have to examine how many interstate commerce laws have been broken. Recall that the US Justice Department chose not to sort out the Bendagate scandal and its alleged links to human trafficking then South Dakota’s GOP congressional delegation miraculously discovered the issue after Rich Benda died.

  15. Cory Allen Heidelberger Post author | 2021-10-11

    Right on, Nick. Simmons’s focus on the Noah article is a red herring meant to paint all critics of perpetual trusts as radical insult monkeys who hate South Dakota and can’t read the Constitution.

  16. bearcreekbat 2021-10-11

    Anybody ever wonder how Journalists were able to obtain all this information, including specific names of uber-wealthy investors if SD makes all this information “secret?”

  17. Mark Anderson 2021-10-11

    You know grudz the founding fathers worried about what others had. In his letters to Adam’s, Jefferson layed out what was he thought was his greatest achievement. The estate tax. Kristi should read that one. It was the way to prevent an aristocracy in America. Jefferson knew his Adam Smith well.

  18. Donald Pay 2021-10-11

    Well, I have to say Timothy Noah has an idea that needs to be considered. South Dakota legislators regularly propose schemes with the intent of consolidating school districts that barely function either educationally or financially. In reality, South Dakota is not much different from an barely functioning school district. South Dakota is already a ward of the taxpaying states of the Untied States. Without the generous donations of non-wealthy citizens of other states, South Dakota’s government would dry up and blow away. If we ended South Dakota as a state, it might have to pay it’s own way for once. Maybe then it would consider taxing the filthy rich.

    South Dakota has pushed big scam on the middle class taxpayer. I checked out South Dakota Trust Company. There’s a nice video with Pierce McDowell, a shirt-tail relative, explaining who his company services. Hint: it isn’t you and me. Probably five to ten people in South Dakota would even qualify by McDowell’s wealth standards for any consideration. He would turn his nose up and sniff, “We only serve the very wealthy.” You people don’t matter to him, so why should you care about his business.

    A state that is on the federal dole funded by middle class taxpayers won’t even tax these uber wealthy people for the money they steal from the federal government. It’s no wonder people in other states would like to see South Dakota extinguished.

  19. Porter Lansing 2021-10-11

    Following Professor Simmons’ Paradigm

    If South Dakota is a perfect place to secretly hide money then it’s a perfect place to secretly hide nuclear waste.

  20. Kyle Krause 2021-10-11

    Somehow, the question of “Is it good public policy to let the ultra-wealthy hide their wealth in secret perpetual trusts located somewhere they have never been?” got turned into “Should South Dakota be a state?” and “Are the wealthy real people?”

  21. Donald Pay 2021-10-11

    Sure, the wealthy are real people, just like corporations.

  22. bearcreekbat 2021-10-11

    No comment about the “secrecy issue,” then?

    Anyone wonder what happens to the principal in a dynasty or perpetual non-charitable trust after the last beneficairy dies? After all, since none of the beneficaries can access the principal or make any testimentary directive or gift of the principal, and since it just might happen that one generation fails to reproduce any new heirs either by unforeseen circumstances or choice, what happens to the principal?

  23. Eve Fisher 2021-10-11

    Re Mr. Grudznick’s hint that poor people are feckless and should just “work harder”, a reminder that debt is not a sin, but usury is. And it’s always better to be a Wilkins Micawber than a Uriah Heep.
    Porter, you’re absolutely right. There’s a lot of secrecy in this state, and considering the absolute hush from our political leaders, I can’t help but wonder how much of the missing EB-5 millions is sitting in one of those perpetual trusts. For that matter, how much of the Gear Up $$$ are there? After all, no one ever found the safe.

  24. ArloBlundt 2021-10-11

    Eve–you are right on the money about the ill gotten gain from EB-5 and Gear Up…where is it? Why is no one in state government looking for it?? All we are left with is dead bodies,

  25. O 2021-10-11

    Happy, well done reminding us that SD has stood for decency in its financial practices when we regulated our usurer, predatory practices with payday lenders. We did not give into “it will jsut happen somewhere else” defeatism then. We did not accept deplorable practices to make a buck for the SD coffers from that exploitation.

    Kyle, “Are the wealthy real people” must be restated as should the wealthy be given advantages at the expense of all other income levels? My point of criticism has always been on the unfairness of tax policy. Tax rates have been consistently cut for those most able to pay (note, the US economy grew FASTEST when the wealthy were taxed the at the HIGHEST rate); work is taxed higher than inheritance and capitol gains; investing is not taxed as other purchasing is; social security is capped at income of $142,800 (so everyone under that wage pays a higher rate) . . . All of this goes to an underlying question of if the wealthy deserve even more wealth protection with trusts? I contend the answer to that is no.

  26. Ryan 2021-10-12

    bcb – you are speaking a foreign language to these people. you understand this issue, and they do not. they just like to be angry, and being angry at wealthy people is easier than understanding the rule against perpetuities and the impact of south dakota not having such a rule. i gave up on this topic several posts ago, but i wish you luck in helping them understand.

    To everyone else – please send me your bank account login information so I can snoop at your dollars and judge the means by which you’ve accumulated them. Hurry now, it’s a matter of international security.

  27. larry kurtz 2021-10-12

    Capitalism is a disease.

    We all suffer high and hidden costs from this parallel legal system — paying more in taxes and getting less in government services. And by hyper-concentrating wealth, South Dakota locks away resources that could spark entrepreneurial innovation. Effectively, South Dakota is setting national policy. Ditch the existing estate tax and replace it with an inheritance tax on those who receive the wealth. Answer the GOP’s bogus “death tax” claims with a “silver spoon tax” — such as that proposed by Lily Batchelder, Biden’s nominee to oversee federal tax policy — that reins in windfalls to kids of super-wealthy family dynasties.

    https://www.washingtonpost.com/opinions/2021/03/19/we-need-rein-billionaires-start-with-south-dakota/

  28. Ryan 2021-10-12

    here is one of the main problems, as quoted by larry kurtz:

    “And by hyper-concentrating wealth, South Dakota locks away resources that could spark entrepreneurial innovation.”

    This is silly. this seems to presuppose that all the “wealth” in these trusts is just stacks of cash, hidden in a closet, being SQUANDERED! haha the trusth is most of the wealth is actually made up of land and business ventures that employ people around the world and produce lots of innovation. People on here pretending that if these rich people would just give their money to strangers or to governments, that money would be put to use making their lives better… completely ignoring reality haha.

  29. mike from iowa 2021-10-12

    I see Ryan is a man of his word when it comes to giving up. Not! I sent you my trust records. What did you do with that info?

  30. Ryan 2021-10-12

    more pertinent and helpful commentary from mike, as usual. thanks for joining mike.

  31. Porter Lansing 2021-10-12

    ryan is a fool … *to be continued

  32. larry kurtz 2021-10-12

    Unless your Social Security pays your property taxes you’re just another poor grudznick eking out a living and bleeding out every penny you can scrabble.

    There’s a reason why the race to the bottom in the trust and banking industries is being waged primarily by low-population states. Consider the trade-off between a few hundred well-paid jobs and the cost of absurdly lax regulation and taxation to the population at large. In states with smaller populations, that trade-off works in favor of those seeking to escape regulation and taxation.

    https://prospect.org/power/why-do-south-dakota-politicians-help-billionaires/

  33. happy camper 2021-10-12

    Ryan makes a completely valid point. Regardless of the owner, the investment is ownership in what may be a legitimate company that employes people and that in itself may have no known connection to the trust. If the trust is being used to invest in non legal investments, then his agrument wouldn’t hold, but otherwise he is correct.

  34. larry kurtz 2021-10-12

    Republicans defend trust privacy but are all to happy to legislate a woman’s uterus: priceless.

  35. happy camper 2021-10-12

    I’m just defending Ryan’s argument. Trust policy is entirely the issue. Since it’s South Dakota Law, South Dakotans should be made aware of the issues, and similar to how they voted down high usury rates, they might reign this in as well.

  36. bearcreekbat 2021-10-13

    larry kurtz, can you identify which SD trust statutes you are referring to in your statement “Republicans defend trust privacy?”

    As I posted in an earlier thread I could only find one such SD privacy statute (SDCL 55-1-58) and it seemed to provide pretty feeble privacy protection since it only took effect if a trustee voluntarily chose to register the trust in court, and since even then the privacy was conditional.

    Apparently, no one else here has been able to identify the particular secrecy statutes that are troublesome as I have asked more than one with zero responses. Perhaps you can identify which SD secrecy statutes have caused the problem that you have identified?

  37. larry kurtz 2021-10-13

    Actually, bat, it was Rick Kahler’s column in the Watertown Public Opinion that elicited that statement.

    Why, then, has so much money flowed into South Dakota trusts? It’s because South Dakota allows a trust to exist into perpetuity, while other states often limit the life of a trust to as low as 21 years. Trusts with no limit on their life are attractive to families who want their wealth to pass from generation to generation. Such trusts, referred to as Dynasty Trusts, do not offer a tax benefit. These trusts pay the highest U.S. income taxes on income retained by the trust.

    https://www.thepublicopinion.com/story/news/2021/10/12/rick-kahler-column-complex-issue-south-dakota-trusts/6059162001/

  38. Whitless 2021-10-13

    With regard to privacy of trusts, most court records are open to the public. Want to see your neighbor’s divorce decree? It’s available or if want to see who your aunt named in her last will and testament to receive her estate, it’s available. However, any court proceeding regarding a trust is not open to the public, and access is limited pursuant to SDCL 21-22-28. The right of trust beneficiaries to receive information about a trust can also be limited. See SDCL 55-2-13. Also, for certain transactions involving property held in trust, evidence is required that the trust exists and the trustee has the authority to act. A common example is the sale of real property held by a trust. Rather than handing over a complete copy of the trust, the law states that a certificate of trust is satisfactory evidence. This provision makes good sense because the buyer of real property only needs to know that the Trustee has the authority to sell and convey the property. To discourage people from demanding a copy of the trust when a certificate of trust would suffice, SDCL 55-4-55 provides that any person who demands in bad faith a copy of the trust instrument in addition to a certificate of trust or applicable excerpts, is liable for damages. (The above code sections may be found on the legislative research council’s website.)

  39. Whitless 2021-10-13

    With regard to the Rick Kahler opinion article, two important tax details are missing. First, a properly drafted dynasty trust will shield against federal estate taxes and inheritance taxes for future generations. Second, while trusts are subject to compressed tax brackets and higher federal income rates, many trusts do not pay federal income taxes. The reason is that trusts offset income by distributions to beneficiaries. For example, a business owned by a trust generates net income of one million dollars to the trust. If the Trustee distributes all of that money to the trust beneficiaries and issues K-1 tax forms for those distributions, then it may offset the income earned by the distributions, resulting in no income tax payable by the trust. Instead, the trust beneficiaries must report the income received from the trust on their income tax returns.

  40. bearcreekbat 2021-10-13

    Thanks Whitless for those citations. It looks to me like SDCL 21-22-28 adds a significant level of privacy since it seems to protect trust records from public disclosure during trust litigation, but with a big loophole – the judge can order disclosure. Such a loophole seems like it would be used as a matter of course by law enforcement to seek a court order disclosiing records in cases of suspected illegal activities or money laundering. SDCL 55-4-55 dealing with disclosures to beneficiaries doesn’t really seem to be the type of secrecy Cory or the articles he has cited are complaining about; my sense is the complaint goes to public secrecy.

    Rick Kahler’s column, also in today’s RC Journal, presumably the same column as referred to by larry in the Watertown paper, is very helpful to me. The quote larry provides, however, addresses a totally different issue than privacy, namely the ability to form so-call dynasty trusts or perpetual trusts. This is the same objection that was raised by O, and other DFP commenters. And as I indicated earlier, preventing any beneficiary from ever accessing the trust prinicpal in perpetuity seems a choice that might be contrary to the interests of those beneficaries; and, if the last beneficary fails to reproduce offspring, that seems to leave the trust principal in limbo and may lose it altogether to the government, contrary to the interests of the original grantor.

    In any evet Kahler’s comment that “all trusts by nature are private. . . . they are not publicly recorded with any government entity” clarifies that all trusts are normally secret. This appears seems to be the standard law everywhere, unless a particular state has affirmatively enacted statute or regulation requiring recording of a trust. This means SD’s so-called secrecy laws are not unusual or different than the laws virtually everywhere else in this particular respect. Hence, rather than a problem with SD unique secrecy laws, perhaps the complaint is that SD, like most other states, has never adopted a statrute requiring all trusts to be recorded in the public record.

    The legal website nolo provides a primer of normal trust secrecy: Although nolo identifies several exceptions to the general rule, it states:

    A living trust never needs to be filed with a court, either before or after your death. The probate court isn’t involved in supervising your trustee, the person you name in the trust document to handle the distribution of the trust assets. The trustee simply follows the instructions you wrote in the trust document, without getting permission or approval from the court.

    https://www.nolo.com/legal-encyclopedia/is-living-trust-public.html

  41. bearcreekbat 2021-10-13

    As to Whitless’s second comment about taxation of trust income and the comments in Kahler’s column, it appears that in fact trust income is taxed by the federal government one way or another – either as income to the trust or as income to the beneficiary.

    The other apparent fact seems to be that the trust principal would also be taxed as income to the beneficary in the year it is distributed – is this correct Whitless? If so, then this raises another interesting taxation issue.

    The federal estate tax exempts over $5 million and as I understand it money inherited is not treated as income for federal income tax purposes. So if a beneficiary inherits $5 million, that money is not subject to any federal tax, But, if instead of inheriting this $5 million the beneficiary receives a $5 million distribution from a perpetual or dynasty trust, wouldn’t that money be federally taxed as regular income to the beneficiary?

  42. Ryan 2021-10-13

    it’s a principal and income question, bcb. If the trust is funded with $5M originally, that $5M is not taxable. As that $5M creates income – from investments for example – the income is either taxed to the trust if retained, or taxed to the beneficiary if distributed. When the original principal – the initial $5M is distributed to a beneficiary, it is not taxed as income because it is not income. That $5M would be tax-free to the recipient. Just like if a parent dies and leaves the home to the kids, those kids don’t pay income tax on the value of the home – but if they rent out the home for several years and split the rent, they would pay income tax on the rent.

  43. bearcreekbat 2021-10-13

    Interesting Ryan, thanks.

    Then in a hypothetical estate with a principal valued at $25 million not held in trust, the first $5 million (I know the exmption amount is a bit higher) that is distributed to the beneficiary would be exempt from federal estate tax and would not be taxed as income to the beneficiary. The $20 million balance of the principal, however, definitely would be subject to the federal estate tax.

    But if that $25 million was put in trust and, assuming it earned 0 income, the principal was then paid out at $5 million per year to the beneficiary over the next five years, would each seperate $5 million distribution avoid both the federal income tax and the federal estate tax?

    And if the trust actually paid out $15 million the first year, and $10 million the second year, would both amounts in excess of the $5 million then be subject to the federal estate tax?

  44. Ryan 2021-10-13

    the federal estate tax is a snapshot as of the date of death, for an easy explanation. It is not an annual amount, it is a lifetime amount. The exemption fluctuates, but for easy numbers it’s about $11.5M per person this year. So if a person dies in 2021 with assets valued at $11M, the decedent can pass all of that to their beneficiaries without the federal estate tax kicking in. Some states have their own estate tax, and some have inheritance tax, but SD has neither. So, if a person put $11M in trust for 1,000 years, the income that is created during that time would be taxable against the trust or beneficiaries, depending whether it was retained or distributed. In 1,000 years when the trust terminates, the original $11M would pass to beneficiaries tax-free as it was “exempt” on the date of death of the decedent.

    If the decedent owns $21M in assets, the first $11M would be exempt forever. The remaining $10M would be taxable under the federal estate tax – which is essentially 40%. So the estate can put the first $11M in trust, then would pay $4M in tax on the non-exempt $10M. The estate could then put the $6M remaining in trust. Then, when the $17M of trust principal is distributed later to beneficiaries, it would all be tax free because some would be exempt and some would have already been taxed.

    Now, there is a super-fun issue buried in all of this called the Generation Skipping Transfer tax, which is an ADDITIONAL 40% if the ultimate beneficiary is the grandchild of the decedent (or great grandchild, etc.). So if the decedent was worth $21M and they want to give it all to a grandchild, the first $11M is tax exempt. The next $10M is taxable under the federal estate tax at 40%, and since the recipient in this hypothetical is a “generation skip” younger than the decedent, the 40% GST (generation skipping transfer) tax kicks in, too, so that $10M is taxed at 80% and the recipient receives the original, exempt $11M and then $2M of the non-exempt $10M.

    Wonderful stuff.

  45. bearcreekbat 2021-10-13

    Thanks Ryan. The details about how trust principal and income are actually treated under current federal income and estate tax law undermines much of the angst apparently generated by recent Pandora Papers reports and stories. While it appears there may be an ability to delay payment of federal estate taxes, it seems as if they will have to be paid sooner or later if any part of the principal is actually distributed.

    I suppose a grantor might conclude that it could be advantagous to never distribute trust principal to his or her beneficiaries and thereby avoid reducing a vast fortune slightly by the federal estate tax. A beneficiary might wonder, however, whether it would be better to pay the estate tax and have full access to the fortune rather than be permanently restricted to mere income distributions in amounts deemed appropriate by a trustee. The Brittany Spears stories come to mind although the legal limitations on her distributions came from a different setup than a dynasty trust.

    And it appears that federal income tax on trust earnings simply can not be lawfully avoided at any time by either the trust, if retained, or the beneficiary, if distributed.

    Today a commentator on Face the Nation stated that SD trust was attractive because the identity of beneficiaries could be hidden by SD law. The SD statute identified by Whitless appears to be different as that limits disclosures to the actual beneficairy, rather than disclosures of his or her identity. And as noted, SD law provides that a court may order disclosure of any information about the trust or its beneficiaries. It seems the TV commentator either did not understand general trust law, which maintains privacy virtually anywhere and is not specific to SD law, or perhaps was referring to a SD confidentiality statute no one on this blog has yet identified. Are you aware of such a statute?

  46. Ryan 2021-10-13

    bcb – the federal estate tax is very good at closing loopholes like you mentioned. the estate is not subject to the tax when the property comes OUTof the trust, the estate is subject to the estate tax when the person dies. So if a guy dies with $100M in his trust and the trust says only pay the income to my family and never distribute the principal, well the trust would be hit with the 80% tax right away when the rich fellow died (40% estate tax, 40% generation skipping transfer tax is 80% on basically $89M because the first $11M is exempt). The IRS is not interested in waiting until assets are distributed to tax those assets. You have 9 months from date of death to file the estate tax return and pay the tax (can be extended, but not for very long).

    I didn’t read the articles you or anybody else mentioned because, like you are suggesting, most of these commentator types don’t know their estate tax from their inheritance tax and it’s not worth reading their misunderstandings. As for privacy in beneficiary information, privacy is and should be the norm, not the exception. When I die, if I have life insurance, how many people think it should be public record who I named as beneficiaries on my life insurance policy, and why, and how much they got? Nobody thinks that, of course. Just like the anti-trust people on here just don’t understand what they are supposed to be upset about, but it sure sounds like something they should be upset about, by golly.

  47. bearcreekbat 2021-10-13

    This has been for me a very informative discussion Ryan. I appreciate your insights.

  48. Ryan 2021-10-13

    bcb – if education was currency, the DFP comment boards (myself included) would still be considerably deep in debt to you, so if you happen to glean something from the rest of us, well, i’m happy to hear it!

  49. larry kurtz 2021-10-13

    FWIW: there are only about 20 South Dakotans whose estate would be taxed. Hani Shafai, Denny Sanford, Stan Adelstein, Tom and Barb Everist, Frank Farrar, Teddy and Rick Hustead, Doyle Estes, Stan and Dennis Anderson, Mike Trucano, Neal Wanless, the Fishbacks, Al Kurtenbach, Dwayne (sp.) Larson and Dana Dykhouse come to mind as taxable estates. Who else?

  50. Ryan 2021-10-13

    larry, you are relying on people advertising the value of their assets, which is not what rich people do, except on TV. I can tell you I have personally worked with dozens of SD families who have taxable estates, and I am just one guy, and my tenure in the industry is miniscule on a relative scale.

    Think about this – if land is selling for $10k per acre, you only need to own 1,000 acres to be knocking on the door of a taxable estate. And if it’s good land, you need even less. And if it’s development land, you might only need a few acres. And what about livestock – those animals are pricey. How about combines, those suckers aren’t cheap. The population of people in SD worth over $10M is waaaaaaaaaaaaay higher than 20 my friend.

  51. larry kurtz 2021-10-13

    Senator Ryan Maher is a banker.

  52. Ryan 2021-10-13

    great link, thanks, larry.

    the problem comes down to the vocabulary in the industry. a taxable estate is an estate with a value that exceeds the federal estate tax exemption amount. in south dakota, I would estimate that there are hundreds of taxable individuals. Maybe a thousand. those folks would pay the tax if they didn’t plan for it.

    The number that you and this link are using (20) is the number of estates that actually paid the tax. Very different. If there are 20 SD residents who pay the tax in a given year, my opinion would be that those folks should have hired better accountants and attorneys because there is a lot than can be done while a person is alive to reduce or eliminate the potential tax, but once you die it’s too late. Those 20 either didn’t plan well or paid some tax in furtherance of some goal they had where tax avoidance wasn’t the most important consideration.

  53. Ryan 2021-10-13

    i would agree that there should be more inheritance taxes and more estate taxes. whether those taxes should be paid to states or the feds, I don’t take a particular stand on. But to be honest, if we had an income tax that was actually fair and didn’t contain ridiculous benefits for hyper-wealthy people and corporations, we wouldn’t need either estate or inheritance tax… but nobody asked me.

    and larry – i’m not trying to read your mind here so excuse me if i am missing the point of your comment, but if you are curious, i am not ryan maher or any other senator or banker. i am also not a republican.

  54. Ryan 2021-10-13

    haha points for trying but no. i have never run for election for anything. i am nobody to anybody except to my girls.

  55. larry kurtz 2021-10-13

    So, the remedy for preventing ill-gotten gains ending up in South Dakota dynasty trusts doesn’t exist?

  56. grudznick 2021-10-13

    Saying Mr. Maher is a “banker” is like saying grudznick and Lar are “Astronauts like Captain Kirk.”

  57. Ryan 2021-10-14

    larry, i would suggest we need to work on remedies for organized crime, political fraud and self dealing, and other crimes that allow the bad guys to amass ridiculous wealth rather than working on remedies for how long their illegal wealth can be held in a south dakota dynasty trust.

  58. larry kurtz 2021-10-14

    That’s akin to saying what Greg Abbott said after ending women’s rights in Texas then going after rapists.

  59. mike from iowa 2021-10-14

    “Space Cadet” is a better fit for Grudzilla than astronaut. Just saying.

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