South Dakota Welcomes $234 Billion Trust Industry

Nearly all industries lobby their state legislators seeking laws in their favor, but no group enjoys a more direct link to the lawmaking process than South Dakota’s $234-billion trust industry.

Each legislative session, an intricate yet vaguely titled bill focused on tweaking the state’s already generous trust laws sails to passage in committee and floor votes, its details hashed out months earlier by an ongoing industry task force.

This year’s version, House Bill 1072, contains abundant cleanup language but also expands the use of non-charitable purpose trusts, which have no beneficiaries but can be used to maintain a piece of property, sustain an art collection or care for a pet.

Critics such as Democratic Sen. Craig Kennedy, a Yankton attorney, wonder if legislators are catering to an industry that serves out-of-state billionaires and centa-millionaires but provides little to the people of South Dakota.

“What we’re doing is we’re passing laws designed by an industry for the benefit of its clients,” Kennedy said on the Senate floor.

“And I challenge most of us, if not all of us, to explain what it is we’ve really done over 20 years.”

In 1997, then-Gov. Bill Janklow created the Governor’s Task Force on Trust Administration Review and Reform to keep the state’s laws current and beneficial to the growing trust industry.

The panel has been widely supported by the South Dakota Legislature and every subsequent gubernatorial administration.

The industry has returned the favor.

Political donors in finance, insurance and real estate have contributed nearly $1.6 million to state House and Senate candidates since 2000, according to campaign finance disclosures. Speaker of the House Mark Mickelson, who served as past chairman of the task force, received a total of $24,550 from the industries during the past three election cycles. And the industries have given more than $347,000 to Gov. Dennis Daugaard’s campaigns during the 2010 and 2014 election cycles and more than $250,000 to Gov. Mike Rounds during the 2002 and 2006 election cycles.

South Dakota’s 94 dedicated trust companies now manage $234 billion in assets, and nine state-chartered banks with trust departments manage an additional $7 billion in assets, said Brett Afdahl, director of the state Division of Banking.

Supporters say South Dakota greatly benefits from the industry’s presence.

Terry Prendergast, a Sioux Falls-based trusts and estates attorney who serves on the task force, said trust companies add $1.4 million a year in bank franchise taxes, more than $800,000 in administrative fees and $300,000 in examination fees to the state’s coffers.

South Dakota also benefits from more than 500 high-paying jobs in the industry and charitable contributions from wealthy benefactors who invest in the state, Prendergast said. During recent legislative committee testimony, he cited the support of a new cancer center being built in Pierre by Avera Health in the form of a $10 million grant from the Sioux Falls-based Leona M. and Harry B. Helmsley Charitable Trust.

“These trusts and trust companies pay their own way,” Prendergast said.

Democratic Rep. Susan Wismer, the trust bill’s prime critic on the House side, said the $2.5 million benefit is a tiny fraction of the $234 billion of assets under management in the state. She said the industry’s greatest benefactors are rich people looking to shield their wealth from tax burdens.

“Basically, this is a tax-avoidance mechanism that historically our laws have discouraged,” said Wismer, of Britton.

South Dakota’s emergence as the nation’s premier spot to site trusts can be traced back to its lifting of the rule against perpetuities in 1983. The common law rule, which dates back to 17th century England and was adopted in 19th century America, invalidates an interest in property 21 years after the death of a person alive when the interest was created.

South Dakota “broke the social norm” when it abolished the limitation within the state’s borders at the behest of the Homestake Mining Company, Wismer said.

“No other state had done that,” she said “But once South Dakota did it, then everybody else kind of had to rush to fill in the breach so they didn’t lose their trust industry to us.”

Despite the rule change, the industry didn’t begin to take off in South Dakota until 1997, when Janklow established the trust task force and began to entice rich benefactors to establish trusts within the state. The change opened the door to dynasty non-charitable purpose trusts, which allow a wealthy benefactor to establish a trust to care for a beloved pet, preserve a priceless collection, provide upkeep for a grave or monument or maintain a family vacation home.

Although more than 30 other states have since lifted their rules against perpetuities, South Dakota’s lack of state or local income tax and its generous privacy laws help keep it atop biennial state rankings published by industry journal Trusts & Estates. The task force strives to make sure that continues by annually tweaking South Dakota’s laws in trust companies’ favor.

HB 1072, the 21st of such annual tweaks since the task force’s inception, sailed through the House 66-3 and passed the Senate on a 29-5 margin, and it’s nearly a guarantee to be signed by Daugaard. The only Republican to oppose the measure was Rep. Steve Livermont of Martin.

Kennedy and Wismer worry that legislators serving on the Senate and House judiciary committees often have to defer to industry experts on bill details, and there aren’t enough advocates for average South Dakota citizens.

“The little guy is not represented in the discussions on this governor’s task force,” Wismer said.

Daugaard made several changes to the task force this past summer, Afdahl said, shrinking it into an 11-member panel now made up entirely of industry representatives. The group includes trust company executives, trust attorneys and a University of South Dakota associate law professor specializing in trusts and estates. The task force previously had to be reauthorized by executive order every four years, but Daugaard made it a permanent body. 

Dorsey & Whitney Trust Company President Carl Schmidtman took over as chairman, taking on a role traditionally filled by a state lawmaker, and Daugaard removed the state Division of Banking, which regulates trusts, as an active participant.

Prendergast said South Dakota is the only state with a continuously meeting task force devoted to trusts and trust companies. He said any proposed law changes must have unanimous support from members, and issues are often discussed and scrutinized for multiple years before they make their way into the annual bill.

“South Dakota has consistently been at the top rung of all jurisdictions in financial affairs because of our attitude that people should be allowed to do with their property what they desire to do, within reason, and should be allowed to convey their property to whom they desire to convey it, within reason” Prendergast said. “Our entire regulatory scheme reflects that positive attitude and attracts people from around the world to look at South Dakota as a shining example of what trust law can become.”

Wismer acknowledged she can’t turn back the clock and reinstate the rule against perpetuities, but she worries that no one in the Legislature wants to consider whether it’s bad economic policy to lock up estates forever.

“I don’t think we’re paying enough attention to what the long-term consequences of locking up those assets might be,” she said.

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