In South Dakota, a farm state that’s home to two of the 10 poorest counties in the U.S., lawmakers say they’re bolstering the trust industry to generate work for local law firms and bankers, and forge ties with prosperous families that may one day decide to build a factory or a warehouse here. The legislators are turning the Mount Rushmore State into the Bermuda of the prairie.
As much as anyone, Pierce H. McDowell III can take credit for this transformation. He works upstairs from the hall of empty offices, on the second floor of the old Kresge five-and- dime, where he’s president of South Dakota Trust Co.
American Siberia
At 56, McDowell has been promoting the state he affectionately calls “North America’s Siberia” for most of his career. In 1993, he published an article in a national estate- planning journal recommending that wealthy people across the country establish dynasty trusts in South Dakota.
Because the estate tax is imposed on large fortunes at death, McDowell wrote, wealth that’s big enough to last for generations will have to contend with multiple tax bills. A father pays the tax when he leaves his money to his children, who pay again when they pass it down. Each generation faces a toll. The current rate is 40 percent.
McDowell’s solution was for the father to establish a never-ending trust that pays each generation of heirs only what they spend, while the rest of the money grows. In 1993, when McDowell was writing, that wasn’t possible in 47 of the 50 states because of an ancient rule limiting the duration of trusts to the lifetime of a living heir, plus 21 years. The concept has been a part of Anglo-American jurisprudence since a case decided by England’s Lord Nottingham in 1681.
South Dakota repealed that rule in 1983, and unlike Idaho and Wisconsin -- the other two states without the provision -- it had no income tax. So, McDowell wrote, a trust set up here could shield a big fortune from taxes for centuries, escaping tax bills as it hands out cash to great-great-great- grandchildren and beyond.
Over dinner at a Sioux Falls restaurant this month, McDowell elaborates on the idea. He has curly gray hair and a quick laugh, and he’s wearing an open collar under a quilted winter vest. He’s known around town for making the one-mile trek to his office on a fat-tire bicycle, even in December.
“I like to equate it to the wine in this glass,” McDowell says, covering his Cabernet with his right hand. “Here you’ve filled it to the rim and push it downstream to the next generation. You can sip from it, you can have the equivalent of outright ownership, but you don’t own it under the law. Your children -- they too will have the opportunity to sip from it.” He cups his hands as if to cradle the precious liquid.
“In most states, the glass has to pour out completely in a generation or two. We did away with that in 1983.” He chops the air with his hand.