What is a tax haven?

The Cayman Islands. Bermuda. Switzerland. Luxembourg. The British Virgin Islands. These are some of the world’s most well-known tax havens. But…South Dakota? The United States isn’t typically known for such tax advantages, yet it was recently discovered that approximately a half-trillion dollars is being sheltered in trusts in the Midwestern state. 

The discovery, made recently with the release of what is now known as The Pandora Papers, was illustrated in leaked financial records that describe how wealthy, powerful people have exploited the financial system. What is it about South Dakota that makes it so enticing to people seeking to shelter their financial assets? 

Key laws led to unprecedented loopholes

According to experts, South Dakota enacted pivotal legislation several decades ago that enabled financial trusts to last in perpetuity. Combine this with South Dakota’s zero percent income tax (South Dakota has no individual or corporate income tax), and suddenly the ability to share assets with successors — all while avoiding estate taxes — becomes an easily achievable, and accessible, goal. 

It’s important to note that, when it comes to dividends received and any capital gains, these trusts are still required to pay federal income tax. Another major distinction here is that trusts would typically pay the state income tax and are not required to do so in South Dakota.   

What’s more, shortly after the 2008 economic crisis, South Dakota allowed individuals to do two unusual things in regard to trusts: 1) They could declare themselves beneficiaries of trusts, and 2) They could hold these trusts in what The Washington Post described as, “virtual secret.” 

This tax-friendly (or what some might call tax avoidant) financial strategy very quickly attracted those who wanted a way to shelter their wealth as the leeway for trust-related regulations became increasingly open. 

This tax-haven strategy became so appealing that non-residents began creating trusts in the state, and its operating procedure of not sharing trust-related information with other state governments means that in the instance that this trust might owe taxes in other states outside of South Dakota is virtually unknown. 

Loopholes are loopholes — but are they illegal?

While it’s no surprise that tax loopholes would be taken advantage of, some critics warn that these trusts have too little oversight and enable beneficiaries to take advantage of a tax system that allows the very wealthy to avoid paying taxes. 

But are these tax havens and their associated loopholes illegal? Here’s the important thing to remember: Though there are ethical debates that one can have regarding South Dakota’s legal attitude toward trusts and their, if any, financial responsibility to the state may be, the law is the law. 

Unless some sort of fraud can be proven, these trusts could at best be categorized as cases of tax avoidance. Do these trusts arguably have more accurate tax responsibilities than they are currently beholden to? Not according to the letter of the law. Unless the citizens of South Dakota are clamoring to change these laws, then these matters lie in the realm of ethical debate vs. criminal act. 

It’s fair to assume regulators are on the lookout for fraud

Of course, this doesn’t mean that government institutions like the IRS aren’t very curious about how these tax shelters operate. With the assets of these trusts at an estimated value of approximately a half-trillion dollars — largely managed by over 50 chartered trust companies residing in just a few blocks in Sioux City — is certain to raise some eyebrows. 

The role of any institution accusing an individual or a corporation of committing a crime is to provide evidence that proves intent — that a crime was intentionally and knowingly committed.

Accidentally misreporting one’s taxes is considered negligent, not necessarily criminal, behavior and is handled by agencies like the IRS in a different manner than what they suspect as being fraudulent behavior.  

Facing criminal tax fraud charges? You need DeGroot!

If you or an associate has been accused of tax fraud-related crimes, then finding experienced, effective representation is key to protecting your constitutional rights — and your freedom.

An ineffective defense can lead to potential criminal prosecution, could include prison time, exorbitant fines, years of probation, and even restitution. And if you should choose to forego having a strong defense team by your side, the odds aren’t totally in your favor. Approximately 60% of the people convicted of tax fraud go to prison, with an average sentence of over one and a half years. 

The Law Offices of Robert J. DeGroot have been serving the citizens of New Jersey for a half-century, and in that time have built an well-earned reputation for providing defense strategies that are strong, thorough, and effective. 

You deserve the best possible defense when your freedom is on the line. When you choose the Law Offices of Robert J. DeGroot you get a true partner who is committed to your needs. 

Don’t delay. Contact the Law Offices of Robert J. DeGroot TODAY for your confidential consultation. Experience. Discretion. Results. Contact us NOW!