Meet the New Global Tax Haven, the United States

A year ago, Charles Rettig, the Internal Revenue Service (IRS) Commissioner, compared the taxes that the US federal government should collect, at current tax rates, with what it does collect. The gap, he contended in testimony to the US Senate Finance Committee, approached, or even exceeded, $1 trillion a year. On an annual basis, that is about 10 times more than all the new spending Congress approved over the past two years in the infrastructure and climate (Inflation Reduction Act) bills combined.

Rettig’s estimate suggests that tax avoidance is rising rapidly. From 2014 to 2016, the gap averaged $498 billion a year—still an enormous sum, but half as much.

How does this tax evasion happen? A report published this fall by the Institute for Policy Studies, authored by Kalena Thomhave and Chuck Collins, investigates one mechanism. In Billionaire Enabler States: How U.S. States Captured by the Trust Industry Help the World’s Wealthy Hide Their Fortunes, Thomhave and Collins show how the United States has become home to $5.6 trillion in trust and estate assets.

US Wealth: Hidden in Plain Sight

The United States is one of the wealthiest countries in the world. According to the 2022 Global Wealth Report by Credit Suisse, mean wealth, or net worth, per US adult is $579,050, the second highest level in the world, after Switzerland. But in median wealth—that is, the wealth holding of an adult situated at the middle of the population—the United States ranks far lower, in eighteenth position, at $93,270. The reason for the difference—the US has an extraordinarily high degree of economic inequality.

The real-life implications of economic inequality are enormous. Here’s a quick comparative illustration: the same Credit Suisse report indicates that in Canada the mean wealth per adult is $409,300 (in US dollars), which is roughly $170,000 less than in the United States, even as the median wealth of a Canadian adult is $151,200—or nearly $58,000 higher. In other words, even though Americans have greater per capita wealth than Canadians, most Americans are less well off than their Canadian counterparts.

What accounts for such extraordinary concentration of wealth at the top in the United States? There are many reasons, including public policies—both on the expenditure side (that is, government support for education, childcare, healthcare, and so on) and on the revenue side (that is, how progressive or regressive taxes are). But tax avoidance and outright tax evasion (only the latter is illegal) also play an important role.

Increasingly, moving assets abroad is not necessary as the United States itself has become a favored site for sheltering money from tax authorities.

Historically, the ultrarich—defined by Credit Suisse as families with $50 million in assets or more—have parked their assets in places like Switzerland or the Cayman Islands. The latter, as one website that encourages relocation notes, is a “jurisdiction of choice” for high-net-worth individuals and family wealth management offices. The website also mentions that the British territory is just a “70-minute flight from Miami.”

But increasingly, moving assets abroad is not necessary, as the United States itself has become a favored site for sheltering money from tax authorities. Not only is this true for wealthy Americans, but for international elites. This year, the Tax Justice Network ranked the United States as the number one preferred location for non-US nationals to shelter their wealth. As Thomhave and Collins observe, “The concept of the ‘offshore’ tax haven has very much washed ashore” (4).

Return of the Dynastic Trust

Trusts, as Thomhave and Collins explain, are “financial arrangements that allow a person to transfer their property to another party, the trustee, who manages the property for the sake of a beneficiary” (5). Typical uses, they note, are for parents to establish funds for their children to access after they become adults or for a caregiver to establish a fund to ensure care continues for a loved one after their death.

But trusts can also be used to retain wealth for multiple generations. The rules restricting how long trusts can remain in effect and how they may be used have loosened considerably. For example, we have seen the erosion—and, in some states, the abolition—of the rule against perpetuities, which sets a time limit on how long a trust can remain in effect.

This rule was based on a 1682 British common law case. The idea behind the rule, explains Kathleen Laipply in an August 2022 article in Golden Gate University Tax & Estate Planning Review, was to keep feudal lords from maintaining land in trust without limit. Under its provisions, an interest had to “vest” within 21 years after the death of a potential beneficiary who was alive when the trust was created. While the rule’s implementation is complex, the principle is simple enough. As a California law firm site explains, “While decades and, indeed, almost a century can pass while the decedent’s wishes are controlling, the law provides that such efforts must eventually lapse.”

The rule was law throughout the land until the 1980s. Its erosion—and the revival of the dynastic trusts that the 1682 British common law ruling had abolished—began in South Dakota in 1983. As one South Dakota-based trust company explains, the state’s 1983 law “cleared the way” for the “dynasty trust.” As the company website details, “a South Dakota Dynasty Trust is a very powerful planning tool that preserves family wealth over generations, allowing a trust to live in perpetuity (forever), therefore never subjecting the assets to federal estate taxation through a forced distribution.” It is available to both state residents and non-residents.

South Dakota also allows for “domestic asset protection” provisions. As Thomhave and Collins explain, if the trust creator is also a beneficiary, they can retain access to family wealth while shielding assets from creditors and tax authorities, “because if you don’t technically own the wealth, you can’t be forced to use it to satisfy your business or tax obligations” (7). Trusts are also useful for shielding assets from potential claims by future spouses, as the trust company touts.

The trust firm further boasts, “South Dakota has the most robust privacy trust laws in the nation, with a total, non-discretionary seal on trust information forever.” Thomhave and Collins estimate that 106 trusts in the state control $512 billion in assets. This amounts to about 9 percent of estimated US total assets and equals roughly eight times the state’s annual gross domestic product (GDP).

Beyond South Dakota 

South Dakota may have been the first state to revive the dynastic trust. But the practice has spread widely. The four most permissive states, according to Thomhave and Collins, are South Dakota, Alaska, Nevada, and Delaware. Many others are not far behind. According to the authors, Illinois houses an estimated $1.1 trillion in trust assets, while New Hampshire is home to an estimated $669.2 billion in assets.

George Bearup, an attorney at Greenleaf Trust, writes that the movement to repeal the rule against perpetuities “has been a ‘bottom up’ approach led by banks that seek to attract trust business and wealthy families who wish to exploit the high federal estate … exemption amounts.” Bearup adds that state legislatures which “wanted to compete for trust business found it easy to listen to the banking industry,” and many have repealed or eviscerated the rule against perpetuities. The benefits to state coffers are limited, since, as Thomhave and Collins detail, “None of the states profiled in this report tax trust income” (9). But banks and estate attorneys do benefit.

In any case, the pervasiveness of the movement to loosen trust rules cannot be denied. As Thomhave and Collins detail, 11 states have followed South Dakota’s lead—Alaska, Arkansas, Idaho, Kentucky, Missouri, New Hampshire, New Jersey, North Carolina, Pennsylvania, Rhode Island, and Wisconsin. Both “red states” and “blue states” are in the mix. Delaware also allows perpetual trusts, but real estate holdings can “only” be in the trust for 110 years. New Mexico also allows perpetual trusts, while restricting real estate assets holdings to a near-perpetual 360 years.

Another 11 states, while technically not allowing perpetual trusts, changed their laws to allow trusts to last 300 years or more—including Alabama, Arizona, Colorado, Connecticut, Florida, George, Nevada, Tennessee, Texas, Utah, and Wyoming. Mississippi allows for trusts to last 360 years (except for a 110-year limit on real estate holdings). Another group of nine states—Hawaii, Illinois, Maine, Maryland, Michigan, Nebraska, North Dakota, Ohio, and Virginia—along with the District of Columbia, have “opt out” provisions that effectively allow for dynastic trusts.

Assets held in trust accounts nationwide have climbed from $678 billion in 1990 to $5.626 trillion in 2021.

It is perhaps worth noting the absurdity of perpetual trusts. University of Michigan law professor Lawrence Waggoner pointed out in a 2014 law journal article that the average trust, if allowed to persist for 350 years, is likely to have 114,500 living beneficiaries. As Waggoner details, the administrative complexity in either having one massive trust with a huge number of descendent beneficiaries, or, alternatively, the work required to continually divide and sub-divide the trust boggles the mind.

Absurd though the long-term consequences may be, perpetual trusts, Laippily observes, “are now standard for high-net-worth individuals.” And the consequences at least at present are to “perpetuate the concentration of wealth.” Nationally, Thomhave and Collins—citing data from economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman—report that assets held in trust accounts nationwide have climbed from $678 billion in 1990 to $5.626 trillion in 2021 (8).

How Trusts Might Be Reined In 

In their report, Thomhave and Collins outline a range of policy reforms that, if enacted by Congress, could rein in the explosion of trust assets and resultant loss of public tax revenues. Among these are the following:

• Establish a federal trust registry: Thomhave and Collins contend that “as a condition for their existence, trusts should be listed in a public registry, like property deeds, and the identities of grantor, trustee, beneficiary, and protector should be disclosed. Certain transactions should be publicly recorded, including those involving international bank accounts or the release of a will and testament” (25).
• Place a ban on trust grantors and beneficiaries being the same person: This would end “domestic asset protection” trusts.
• Create a federal rule against perpetuities: A federal law of this kind would preempt the state laws allowing perpetual trusts and restore time limits to trust duration, as existed for three centuries.
• Tax undistributed income from trusts at a higher rate: Thomhave and Collins propose a tax rate that is five percentage points above the maximum income tax rate on annual trust income that exceeds $250,000 to encourage payouts from trusts and discourage the accumulation of dynastic wealth. 

• Make estate taxes meaningful again: Thomhave and Collins advocate shoring up estate taxation more broadly, including by closing loopholes and assessing an annual wealth tax on trusts with over $50 million in assets.

Earlier this year, in an article about reining in excessive CEO pay, I noted that outlining reforms is helpful, but amassing the political power to enact recommended policy changes is more difficult. If this is true with CEO pay, the obstacles are perhaps even more daunting when it comes to reining in dynastic wealth.

The emergence of the United States as a global tax haven speaks to…the political power of America’s own aristocracy.

Under President Joe Biden, when it comes to taxing the wealthy, most efforts have been blocked, but small gains were made, most notably heightened tax enforcement (an IRS budget increase), as well as a small tax on stock buybacks and a corporate minimum tax.

The reasons for these limited gains are not hard to discern. Oligarchy—as Thomhave and Collins remind us—“is not confined to Russia” (5). Indeed, the United States’ emergence as a global tax haven speaks to that oligarchy and the political power of America’s own aristocracy. One sign of growing billionaire power: a report issued last month by Americans for Tax Fairness found that the political contributions of 465 US billionaires totaled $881 million in the 2021-2022 electoral cycle (through September 30, 2022). This is the equivalent of 7.4 percent of all donations and reflects more than a 20-fold increase compared to the 2009-2010 total billionaire donations of $32 million.

In short, confronting what Maurice Mitchell recently termed the “expansion of corporate and billionaire power” remains a central aspect of today’s struggle for economic justice. The Thomhave and Collins report does not address how to build the power necessary to implement the kind of reforms they recommend. But their work does map some key mechanisms of elite wealth concentration—and offers some valuable tools movements can use to throw sand into at least a few of its gears.