South Dakota harbors around $243 billion dollars. Those assets are kept in any one of the 94 trust companies or state-chartered banks. All that’s needed is a physical office located within the state’s borders.
The business-friendly climate in South Dakota has laid fertile ground for the trust industry to take root in the state. Lawmakers consider legislation annually to maintain that status. Those efforts have given South Dakota the nickname "Bermuda of the Prairie."
While the numbers are impressive, not everyone thinks keeping those assets in trust is a good idea.
Many interesting South Dakota government stories have their beginnings in a simple sentence, “Governor Bill Janklow had a idea…”
In 1983 during his first term as governor, and at the request of the Homestake Mining Company, South Dakota became one of the first states in the country to remove the rule against perpetuities. For simplicities’ sake, this rule prevents wealthy people and estates from controlling their assets for too long after they’ve died.
Children and grandchildren are generally unaffected by perpetuities, but after a period of time, a steep tax encourages the reallocation of that money back into the economy… rather than staying locked up and under control of the dead.
“People who have wealth are going to seek to protect that wealth, whether it’s in South Dakota, whether it’s in another state, or whether it’s off shore," says State Representative David Lust, a Republican from Rapid City.
He has chaired the state’s Trust Task Force in the past. The task force is a group comprised of representatives from the trust industry, with the goal of maintaining South Dakota’s “stature as the premier trust jurisdiction in the United States.”
The task force began shortly after an executive order in 1997 by then Governor Janklow, his second time as governor.
Pair that with no state income tax and a business friendly environment, and…
“I think that opened the door to a lot of the banking industry coming here, Citi Bank and the other banks that have come here, since that time," Lust says. "As an ancillary benefit, this created this hospitable environment for trusts that we have now promoted and enhanced with ongoing regulation tweaks and revisions over the last twenty years.”
Those tweaks and revisions are the product of the Trust Task Force. Last week, the house passed two bills, House Bill 1028 and House Bill 1072, that supporters say are clean up language in trust statute.
The result of that annual attention to detail is $236 billion held by 94 trust companies across South Dakota. That doesn’t include an additional $7 billion managed by the state’s 9 charter banks. Supporters say it’s about more than just money held in the state.
Testimony before a house committee last week outlined that the trust industry generates around 500 jobs that pay on average $80,000 to $90,000 a year.
“And they’re good jobs,” says Patrick Goetzinger, an estate lawyer from Rapid City.
“It’s clean industry. We’re not burning coal, we’re not using natural resources," Goetzinger says. "These are great jobs for college graduates. These are great jobs for those coming out of two-year associate degrees—good professional positions that are the types of things you want to make part of your state economy.”
Goetzinger says the trust industry is a net gain for the state. He points to the sales tax generated from professional services involved with trusts and the bank franchise tax, which generated $2 million last year. The industry even pays for its own regulation. Costs to the state for audits are picked up by the company itself.
Supporters say the reality is that wealth and property will get held up in trust somewhere, so why not in South Dakota?
But there are two sides of the American Dream at play here. One is the ability to hold on to wealth that someone spent a lifetime acquiring. But critics of the industry and the state’s efforts to make it flourish in South Dakota, say it keeps assets under hold and prevents economic growth.
Democratic State Representative Sue Wismer says when the state first removed the rule against perpetuities, it broke a shared social contract. And that was the general understanding that it’s not good for an economy to have assets tied up in one place forever.
The Democrat from Britton says property and wealth need to circulate.
“Economists will tell you that that is good for the economy," Wismer says. "It’s good to promote movement, the reallocation of assets on some economic basis, rather than allowing them to stay locked up in one entity because it was a dead person’s desire to keep those assets locked up.”
When South Dakota repealed the rule against perpetuities, 32 other states followed suit.
Ever since the Trust Task Force formed in ’97, Wismer says there’s been a race to the bottom to keep the trust industry attracted to South Dakota.
She says the implications of cutting taxes and creating enticements for businesses to relocate to South Dakota cause enormous damage to a market driven economy.
“Yes, we have immediate benefits from these nice, expensive, well-paying trust jobs that are building up in Sioux Falls," Wismer says. "But there’s a real long term cost to tying up, to enabling these dynasties to be built and to live long past the lifetimes of the people who are choosing to do that today.”
Wismer says the state has gone out of its way to allow wealthy families in the US to avoid paying what she calls legitimate taxes.
But don’t expect South Dakota to impose those taxes any time soon.
“Two things, that has not been the philosophy in South Dakota," Representative Lust says. “We do not have a corporate tax, why would we have a tax on trusts? It would be incongruous with the way we’ve operated as a state. And two, there’s a very real potential that if you start taxing these… they’ll simply go to another state or somewhere else."
Lust says the state will more likely concentrate on maintaining that balance which keeps South Dakota attractive for the trust industry, while ensuring fair regulation with little expense to the state.