Taxing trusts would be bad for S.D. They'd leave and take jobs
This is the third in a series of interconnected essays. The first installment can be read here. The second installment can be read here.
Proud resident of our state’s third-largest city and astute businessman Toby Dobey is running for governor. His campaign platform includes tapping “external revenue sources that are just waiting to be harvested and collected by South Dakota.” This includes taxes on tourists — a visitor consumption tax that if calibrated carefully could indeed raise some revenues without dampening the out-of-state economic injections that tourists bring to the state.
Doeden’s platform also includes a tax on trusts, “charging all the rich billionaires from around the world that are parking their money here in legacy trusts.” Imposing a new tax on trusts would do two things: (1) It would raise little or no revenue; and (2) It would ensure that those billion-dollar trusts which are administered by South Dakota trust companies would promptly depart to tax-free states, leaving those companies to lay off their employees and close their doors. South Dakotans would become unemployed, and a small but vibrant financial services industry would be vaporized.
That which Doeden would tax would not stay around to be taxed. And it would take its jobs with it.
A trust is a straightforward idea. Whenever a parent gives a babysitter $20 to take the children out for an ice cream, a trust is created. The parent (as “grantor”) enters into an agreement with a babysitter (as “trustee”) to administer funds for the benefit of the children (as “beneficiaries”). Anyone can grasp intuitively that this agreement (a “trust agreement”) requires the babysitter to abide by it. The babysitter would return any unspent funds to the parent. And the babysitter would breach the agreement if she spent the $20 on cigarettes or video lottery.
That’s a trust.
You might object to the foregoing illustration because trusts have to be fancy indecipherable documents. You would be wrong. In South Dakota (and many states), most trusts don’t require any writing, let alone a signed writing. Indeed, not even verbalizations are required; South Dakota allows a trust to be created by “any words or acts” indicating an intent to create a trust — so in the right circumstances, a wink and a nod could suffice to create an enforceable trust.
Most of us have a trust without even knowing it. Pensions, 401(k)s, and 403(b) retirement accounts are trusts in which the employee is the beneficiary and the plan-trustee holds the assets. Retirement account trust agreements are set forth in the plan’s fine print; they’re a one-size-fits-all trust.
But they’re trusts.
Most family trusts, by contrast, are individualized, such as a trust to care for minor children in the event of their parents’ premature departures. Many family trusts are indeed lengthy, specialized legal documents drafted by attorneys. But at their core they’re based on the same concepts as the babysitter trust. Some, for the wealthy, just hold a whole lot more money.
The trusts managed by the 150+ state chartered public trust companies across South Dakota have developed a vibrant business employing hundreds of South Dakotans. This small, quiet industry provides good-paying jobs, including jobs for dozens of my former law students. The industry is modest and quiet despite administering $900 billion (with a “b”) in assets, some of which are assets conveyed by grantors from across the globe. South Dakota is managing worldwide-sourced wealth and generating jobs and salaries because of it. Governor Janklow was the forward-thinking politician who had the vision of creating these jobs by constructing a favorable tax-free and prudently regulated jurisdiction in which trusts could be administered.
As things are now, South Dakota is repeating small but not insignificant financial gains from wealth generated from across the country and the world. We are the number one trust jurisdiction in the country. The question is whether to reverse that.
Naturally, one would expect there to be a bigger impact than a few hundred jobs created by the administration of nearly $1 trillion in assets. But this misapprehends what most trustees are tasked with.
Consider again the IRAs held at a local investment advisor’s office. I have a soft spot for Edward Jones, so let’s use them as an example.
Your local Edward Jones office probably employs two people, an investment advisor and an administrative assistant. If it’s a rather successful office, maybe it holds investments in IRAs totaling $100 million. The companies whose shares are held in those accounts operate in other states or even other countries. The shares in General Motors, Amazon, 3M, and GEICO just sit there in the Edward Jones office; their offices and plants are elsewhere.
The investment advisor doesn’t manage the businesses, he or she just holds the shares in clients’ accounts and posts the dividends. For this service, the fee must be competitive. The same goes for trust companies.
If you were told that South Dakota had imposed a tax on IRA accounts in South Dakota, wouldn’t you consider moving your IRA to a state that didn’t if it would avoid the tax? Why wouldn’t you?
One of the principal reasons that South Dakota attracted trusts from across the globe in the first place is because South Dakota does not tax trusts, via a state income tax or otherwise. If we impose a tax, the attraction of South Dakota as a favorable jurisdiction is destroyed. And the trusts will leave.
Moving a trust account from a trust company in South Dakota to a state without a trust tax is about as easy as moving your investment account or opening a different bank account.
Indeed, I have heard anecdotally that some South Dakota-based trust companies are already pulling up stakes in view of Doeden’s plan to tax trusts. Those accounts won’t wait to be taxed, they’ll move before they’re taxed.
In other words, Doeden’s pledge to tax trusts is already harming the economic vitality of South Dakota. Jobs will be lost. An industry that contributes $300 million to the South Dakota economy will be gone. It’ll be gone very quickly, so that there will be nothing left to tax.
And it won’t come back.
If you doubt that billionaires are that sensitive to easily-avoidable taxation, consider the example of Alaska, which was once a competitor for trust accounts in the trust industry. Just the whisper of the idea of a trust tax decimated their nascent trust industry. The tax never even passed. But before the proposal was retracted, the business had departed for safer states. Some came to South Dakota. And now they’re preparing to go to Delaware, Nevada or maybe Wyoming.
It’s taken 30 years to build the vitality of the trust industry in South Dakota. I’ve participated in about 5/6ths of that, including many volunteer hours drafting legislative improvements. Candidate Doeden’s plan is dismantling those efforts even before he’s been elected. So, yes, if my tone sounds a bit personal it is because for me, it is.
More importantly, it’s heedless. It’s a wealth-and-jobs transfer to other states.
It’s a bad idea.
Thomas E. Simmons is a professor at the University of South Dakota Knudson School of Law in Vermillion. The views and opinions are those of the writer and not those of the University of South Dakota, its Knudson School of Law, or the South Dakota Board of Regents.
Photo: public domain, wikimedia commons
The South Dakota Standard is offered freely and is supported by our readers. We have no political or commercial sponsorship. If you'd like to help us continue our mission to advance independent political and social commentary, you can do so by clicking on the "Donate" button that's on the sidebar to your right.
Follow us and comment on X and Bluesky
