One clue to how much wealthy families might save comes in McDowell’s 1993 article. Just $1 million invested in a dynasty trust, and earning 12 percent a year, would swell to $1.9 billion in 85 years, he wrote -- compared with $488 million if the same trust was located in New York, subject to both state income taxes and the federal estate tax when it expired.
Beneficiaries must still pay personal income tax on distributions from these trusts, McDowell said. If a family runs out of heirs before a trust is exhausted, the leftovers are typically directed to a charity, he said.
Proven Tactic
Loosening local laws to attract out-of-state business is a proven tactic for South Dakota. In 1981, it lured Citicorp’s credit-card business -- and hundreds of jobs -- from New York by becoming the first state to repeal limits on interest rates. Other lenders followed. The credit-card industry, along with a boom in farm profits, help explain why Sioux Falls’ unemployment rate of 2.9 percent is less than half the national average. Pockets of poverty persist in American Indian reservations in the state’s midsection.
So far, the trust industry’s contributions to state coffers have been modest. Without an income tax, South Dakota doesn’t get revenue directly from the trusts. Companies like McDowell’s pay franchise taxes on their earnings, a levy that raised about $1.2 million last year, according to the state Department of Revenue, out of a state budget of about $4 billion.
Nor has the industry become a major employer. The state estimates that about 100 South Dakotans work for locally chartered trust companies. Then there are an unknown number of jobs in local trust units of national banks such as Wells Fargo & Co., and more work for local law firms and accountants. The trusts aren’t required to hire local money managers or invest in local businesses. By comparison, a typical Wal-Mart Supercenter, of which there are two in Sioux Falls, employs about 350 people.
“If you’ve got several hundred well-paying jobs, it’s worth it to us,” said Governor Dennis Daugaard, a Republican who used to travel to Minneapolis pitching tax-saving trusts when he worked at a bank in Sioux Falls. “It also gives us the opportunity to develop relationships with people who have the ability to encourage business here of other sorts. Now, I can’t point to a single case where that’s occurred yet, but I think it’s possible.”
Perpetual Trusts
When he’s away on state business in New York or Chicago, Daugaard said, he sometimes takes time to meet with wealthy clients of the South Dakota trust industry. He said he thanks them for doing business in his state.
McDowell’s 1993 article publicizing South Dakota’s advantages helped him land a job at Citicorp, setting up trusts for the bank’s clients. As the lender started promoting South Dakota’s advantages nationally, Delaware passed a similar law allowing perpetual trusts.
Alaska was next, after a fishing trip there inspired a New York estate planning lawyer named Jonathan Blattmachr to draft the legislation. A half dozen states, including Nevada and New Hampshire, now jostle for the business of the super-rich.