Did the Pandora Papers Open a Pandora’s Box?

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Read the recent headlines about the so-called Pandora Papers and you would think it opened a Pandora’s box of tax-evasion schemes for the wealthy that leverages favorable tax treatment in certain states, such as South Dakota.

That’s misleading.

But South Dakota has certainly been in the news recently. Coverage of the leaked "Pandora Papers" included headlines like "How South Dakota became a global tax haven," "South Dakota Is a Moral Sewer and Should Be Abolished," and "How South Dakota Became the Caymans of the Heartland." The last called the state "a haven for dirty money."

Wow, this would lead someone to believe South Dakota is unique in providing shelter for illegally gotten gains and levying no taxes on the income generated by the money. That's partially true, but there is much more to the story.

Trusts date back to the days of the Roman Empire. The owner of something of value (the grantor), grants or gives that asset to a trusted advocate (the trustee), for the benefit of someone else (the beneficiary). The grantor gives the trustee a list of instructions (the trust document) on how the trust should be managed and ultimately distributed to the beneficiary.

All trusts by nature are private. Unlike LLCs or corporations, they are not publicly recorded with any government entity. This is one of the reasons why they are popular. In the U.S. they are often used in estate planning to avoid probate, which can speed up the distribution of a person’s estate and, unlike a will, keep the recipients of the assets of the estate private and out of public records.