HIDING MONEY IN THE UNITED STATES: HOW STATE REPEAL OF THE RULE AGAINST PERPETUITIES GUIDED THE UNITED STATES INTO TAX HAVEN DOMINANCE

August 6, 2022Articles, Rule Against Perpetuities, Trusts off
ABSTRACT

Over the last 45 years, several states of the United States have entirely repealed the rule against perpetuities. As a result, trusts formed in those states have the potential to exist as dynastic trusts, so they never vest in a named beneficiary subsequent to the death of the grantor. This note argues that in conjunction with the federal enactment of the generation-skipping transfer tax, the repeal of the rule against perpetuities has furthered concentration of vast wealth in the hands of a few. Furthermore, dynastic trusts have attracted cartels, dictators, kleptocrats and the like, especially foreign investors, because the Internal Revenue Code does not tax foreign citizens with foreign source money, and the states promoting these trusts avoid state income tax. Finally, because the United States has refused to adopt a common reporting standard with other foreign countries, these investors go untaxed in their home countries and domestically. One proposed solution is to adopt a federal rule against perpetuities so that each trust must vest, thus increasing tax revenue and thwarting the intention to accumulate never-ending wealth in the increasingly influential class who aside from dynastic trusts would be subject to the generation-skipping transfer tax. In conjunction, a second solution is for the United States to enact the Enablers Act, which adopts common reporting standards like those of more than 100 other countries.

Table of Contents

I. INTRODUCTION: THE PANDORA PAPERS REVELATION

Since 1986, almost half of the states in the United States have either abolished completely or severely limited the Rule Against Perpetuities (the “Rule”),1 which has encouraged some states to compete to become more tax friendly as it relates to trusts and estate planning. This article evaluates whether the Rule’s demise and the general absence of federal trust regulations has encouraged federal tax evasion and avoidance and what the federal government can do about it. Additionally, this article evaluates whether reinstating the Rule and regulating trusts serves a bigger purpose in stopping criminal money-laundering and tax evasion.

In October 2021, an investigation by the International Consortium of Investigative Journalists2 referred to as the Pandora Papers published millions of leaked documents, which exposed financial secrets of some of the world’s wealthiest people.3 The investigation revealed the existence of United States-based trusts that held combined assets of $1 billion, some of which were connected to people and companies accused of illicit activities and human rights violations.4 The Pandora Papers demonstrated the ease by which individuals and companies exploit loopholes and set up trusts and front companies to evade taxes or hide financial activities from law enforcement and governing agencies.5 More broadly, the Pandora Papers shined a light upon the shadow financial world, which enables the richest people in the world to hide wealth and pay little or no tax.6 The exposed documents included offshore affairs of thirty-five heads of state, multiple government ministers, celebrities and business leaders.7

To the surprise of many Americans, secret financial activities take place not just offshore but in states such as South Dakota, Delaware, Alaska, Nevada and New Hampshire.8 Wealthy elites, drug cartels, and those who engage in tax fraud use financial instruments, tax-friendly laws and the nuance of secrecy that many of the states in the United States offer.9 Successful trust companies argue that their foreign clients want United States-based accounts not to avoid taxes but because they are worried about kidnappings or extortion in their own countries.10 Over the last two decades, business has boomed for United States financial havens thanks to tax and trust friendly regulations.11 In the last decade, the global condemnation of tax havens (such as Switzerland and the Cayman Islands) led to more international regulations and compliance requirements.12 Meanwhile the United States has emerged as a tax and secrecy haven for foreign wealth.13 According to the Tax Justice Network’s Financial Secrecy Index, as of 2022, the United States ranks first in the list of jurisdictions most favorable to tax evasion and money laundering.14

According to the U.S. Department of Treasury, the top one percent of Americans circumvent $163 billion in taxes annually.15 Additionally, in June 2021, a nonprofit newsroom, Propublica, obtained IRS information, which showed how the top twenty-five richest people in America pay little or no tax.16 For example, Elon Musk, the second-richest person in the world paid no federal income taxes in 2018.17 Jeff Bezos, founder of Amazon.com, and once the world’s richest man, did not pay federal income taxes in 2007 or 2011.18 According to a White House report from September 2021, the four hundred wealthiest families in the United States paid a marginal tax rate of 8.2% for the years 2010-201819 compared to the average tax rate in 2018 of 13.3% of all Americans.20

The United States federal income tax reporting relies on a system of voluntary compliance.21 However, I.R.C. § 7201 states, “[a]ny person who willfully attempts in any manner to evade or defeat a tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony….”  Tax avoidance is a legal reduction in taxes while tax evasion is a tax reduction that is illegal.22 Notwithstanding the fact that tax avoidance is not illegal, in 2003 and 2005, the United States Senate Permanent Subcommittee on Investigations reviewed abusive tax shelters marketed by the biggest United States accounting firms and found that these accounting firms created a complex architecture of transactions to enable corporations and rich individuals to obtain tax benefits that were (probably) not the intent of the relevant legislation.23 Presently, the United States loses $1 trillion in unpaid taxes annually,24 which is more than a twofold increase from an average of $441 billion per year between 2011 and 2013.25 Whether from unpaid taxes, tax evasion or hidden assets, missing government revenue is a problem all over the world.26

II. BACKGROUND

A. THE RULE AGAINST PERPETUITIES

The Rule Against Perpetuities originated in the Duke of Norfolk’s Case, 3 Ch. Cas. 1 (1682). The Rule halted otherwise indestructible executory interests that could perpetually fetter the land and inhibit its full development.27 This was a victory for modernity over feudalism in the United Kingdom.28 Later, the common law Rule set forth by John Chipman Gray’s treatise on the Rule Against Perpetuities stated that “[n]o interest is good unless it must vest, if at all, not later than twenty-one years after some life in being at the creation of the interest.”29 Black’s Law Dictionary adds to the Rule “a period of gestation to cover a posthumous birth to be tacked on to twenty-one years after the death of some person alive when the interest was created.”30 The colonists brought the Rule over to the North American colonies and for many centuries the enforcement of the Rule disallowed dynastic wealth and long-term unvested property interests through perpetual trusts in the United States.31 As of 2022, every state had abolished or abandoned the common law “twenty-one years after the death of the life in being” Rule.32 No state has strengthened laws regarding perpetuities of interests or shortened the period allowed but many have replaced the common law with a statutory guideline.33

From a public policy standpoint, a society without the Rule in place has the ultimate undesirable result of concentrating wealth.34 Scholars who have examined and championed the Rule argue that it limits dead hand control of property35 and others argue that the Rule keeps property freely alienable and marketable.36 Historically, courts have upheld the Rule because to void future interests that might vest too remotely, facilitates the alienability of property, helps prevent uncertain title, and encourages owners to make effective use of their property.37 The Rule prevents remoteness of vesting and keeps control of property in the hands of the living.38 However, the Rule also withstood much criticism during the twentieth century including that it was not easy to interpret nor apply.39

The movement to reform the common law Rule resulted in the Uniform Statutory Rule Against Perpetuities of 1986 (USRAP).40 The USRAP provides a wait-and-see period of ninety years and allows reformation of instruments that would otherwise be in violation of the Rule.41 Some legal scholars believe that the promulgation of the USRAP was the beginning of the end for the Rule.42 By creating a ninety-year wait-and-see period, the Uniform Law Commission inadvertently endorsed a ninety-year trust.43 In fact, some states have extended the ninety-year period to five-hundred and even one-thousand years.44 Approximately half of the states adopted some form of USRAP although several states have since abolished the Rule and the USRAP altogether.45 Even in the reformed version of the Rule, many states’ laws require interests to vest within a specified period and continue the long-held policy against remote vesting.46


B. TRUSTS AND ESTATE PLANNING

Trusts are an asset management device that provide for separation between legal and beneficial ownership.47 A trustee holds legal title to a property held in trust while the beneficiary holds equitable title. The trust grantor or settlor grants legal control and ownership to the trustee who manages the trust assets pursuant to the terms of the trust agreement for the benefit of the beneficiaries until the assets are to vest.48 Settlors may create trusts for various reasons, which include tax planning and non-tax-planning purposes. Without the rule against perpetuities as law in the state that the trust is governed, there is no federal requirement that the trust interests vest in any stated time period.49

Trusts are subject to federal income tax law50 and to the laws of the state in which the trust is settled. Under a grantor trust, the grantor or settlor remains the owner of the trust for federal income tax purposes and is taxed on the income.51 Under a non-grantor trust, the trust has its own tax-payer ID and pays tax on the trust income52 but receives a deduction for amounts paid out to beneficiaries.53 The IRS states that there are generally no income tax advantages in forming a non-grantor trust with its own tax-payer identification because the tax rate brackets are compressed for trusts.54 2021 ordinary income tax rates on trusts are 37% at $13,451 of income while individual filers do not reach 37% of income taxed until $523,601.55 However, the Internal Revenue Service (IRS) has noted that individuals and companies use trusts to reduce income taxes through abusive tactics.56 Additionally, high net worth residents in high income tax states, such as California and New York, shift their billions to no income tax states such as South Dakota, Delaware or Nevada and circumvent their home-state tax collectors by moving assets into non-grantor trusts formed in those states.57

Long term irrevocable trusts play a role in estate and tax planning and have grown in popularity over the last thirty years. If a trust is irrevocable, the grantor has given up control over the assets in the trust. Trust companies have cleverly marketed long term or perpetual trusts as “dynasty trusts” with promises to create and grow dynastic wealth over generations.  A trust settlor can shield assets up to the generation skipping tax exemption from estate and gift tax, (after he makes the first transfer to the trust) for as long as the local law permits the trust to exist.58 Any constraint on the length of the trust is ultimately found in the local law application (or lack thereof) of the Rule.59

C. SOUTH DAKOTA: THE CAYMAN ISLANDS OF THE PRAIRIE

South Dakota became a banking powerhouse over the course of the last forty-five years. It began in 1981 when the South Dakota governor, William “Wild Bill” Janklow, while working closely with Walter Wriston, chair of the New York City-based Citicorp, pushed to abolish the state’s usury laws.60 Citicorp then subsequently moved its credit card business to Sioux Falls and many other credit card companies followed.61 Notably, since 1981, consumer debt has spiraled out of control without a usury cap constraint on banks.62 Without usury limits, revolving consumer debt doubled from 1980 to 1985, doubled again by 1990, doubled again by 1995 and again by 2005.63 Consumer debt by 2008 was at over $1 trillion and, as of May 2022, the Federal Reserve estimates consumer debt to be close to $16 trillion.64

In 1983, Govenor Janklow rallied for South Dakota legislators to enact rules deregulating the trust industry and South Dakota became one of the first states to allow interests to remain unvested in perpetuity.65 Removing the rule against perpetuities permits the trust grantor to transfer property into a trust for the lives of the grantor’s children, grandchildren, great-grandchildren and future generations without end. In 1997, with Governor Janklow still at the helm, South Dakota formed the “Trust Task Force,” comprised of legislators and representatives considered experts in the trust industry.66 Appointed by the South Dakota Governor, the task force has the “goal of establishing and maintaining South Dakota’s stature as the premier trust jurisdiction in the United States.”67

Although South Dakota trusts must pay federal income tax on any capital gains and dividends,68 trusts settled in South Dakota pay no state income tax69 and are protected by rigorous asset protection laws.70 Additionally, South Dakota is one of a few states that allow the use of noncharitable purpose trusts in perpetuity.71 A purpose trust permits a grantor to establish a trust for the benefit of a purpose rather than a person with no ascertainable beneficiaries.72 For example, a perpetual purpose trust can hold and provide for control of a family business indefinitely and can direct maintenance and preservation of that business without interference from beneficiaries. Other valid purposes include maintenance of family property or gravesites, digital asset protection and pet care.73 Estate planners can also use non-charitable purpose trusts and there are no beneficiaries to whom the trustee owes a fiduciary duty.74

Not surprisingly, trust assets in South Dakota have more than quadrupled over the past decade to $360 billion in assets, including an increase of $100 billion in the last three years.75 There are currently one hundred-six licensed trust companies in South Dakota alone.76 However, in South Dakota, trusts and their assets remain secret from the public or any government, journalist and tax authorities even when the assets include ill-gotten gains.77 Setting up a trust in South Dakota does not require in-state residency.78 The website belonging to South Dakota Trust Company LLC (SDTC), reads like a history book of South Dakota trust laws.79 The website states that, “In 1983, South Dakota became the first boutique dynasty trust jurisdiction without state income taxes. The decades that followed saw the creation and adoption of innovative modern trust laws that solidified South Dakota’s status as one of the top trust jurisdictions.”80 SDTC lists several advantages of settling a trust in South Dakota, which include unlimited perpetual trusts, best asset protection, most comprehensive privacy statutes and one of the only states to allow purpose trusts, or non-charitable purpose trusts.81 SDTC states that a “South Dakota Dynasty Trust can endure for the longest possible time (i.e. unlimited) and avoid additional federal and state death taxes as well as state income taxes on trust assets with added asset protection at each generation.”82

Evidence suggests that South Dakotans do not understand the trust laws in their state, nor that finance dominates their economy83 with little of the benefit flowing into the South Dakota state budget.84 Because states like South Dakota have foregone any income tax claim on trust assets, such states and their citizens are not benefitting from the booming trust business through state income tax revenue. Trust regulations are complex and even the state legislators who have taken part in the legal changes do not fully understand the ramifications.85 The lawyers, the trust administrators, and bankers are the benefactors.86 And, because of the minimal visibility of the South Dakota trust sector, there has been almost no political pressure for oversite or restructuring until recently.87

South Dakota trust laws and dynasty trusts allow wealth to pass on without paying estate taxes at each successive generation.88 Dynasty Trusts are irrevocable perpetual or long term trusts intended to benefit multiple beneficiaries across multiple generations sometimes forever.89 Non-charitable purpose trusts are also used for estate planning in South Dakota.90 Because other states saw the success that South Dakota had in deregulating the trust industry, over half the states in the United States have also completely abolished the rule against perpetuities or severely extended the length trusts are allowed to exist.91 Perpetual trusts, once almost unheard of for estate planning are now standard for high-net-worth individuals.92

D. THE ESTATE TAX AND GENERATION SKIPPING TRANSFER TAX

Congress enacted the federal estate tax in 1916, which created a tax on the transfer of wealth from an estate to the estate’s beneficiaries.93 “The estate tax is a tax on your right to transfer property at your death and consists of everything you own or have certain interests in at the date of your death.”94 The federal estate tax has always been controversial.[95 Opponents believe that the estate tax punishes the success of the decedent and have cleverly renamed it the “death tax.”96 Supporters argue that the estate tax is a national statement of values and in the last few years one focus of progressive tax plans has been to levy a 45% tax on estates valued between $3.5 million and $10 million.97 The federal government currently only collects an estate tax while many of the American states collect an inheritance tax and an estate tax.98 Currently, the estate tax accounts for a very small percent of the total tax revenue generated from taxes.99 Revenue generated by the estate tax has fallen during the last century because of a reduction in the estate tax rate and a rise in the federal exemption.100 In 2001, according to the Internal Revenue Service, the estate tax liability was $23.7 billion compared to $9.3 billion in 2020.101

Until 1976, wealthy individuals made property transfers to grandchildren or more remote descendants by trust and were able to skip a generation of estate tax.102 For example, a wealthy decedent would leave a large amount of his or her estate in trust for the benefit of his child with the remainder to vest outright to the decedent’s grandchild at the child’s death. In this scenario, only the decedent’s estate pays estate tax and not the child’s estate.103 In 1976, Congress enacted the first iteration of the generation-skipping transfer tax.104 The 1976 version imposed a tax on taxable terminations and taxable distributions from a trust where the beneficiaries belonged to more than one generation below that of the grantor.105 Because this law in practice was unduly difficult to administer and included many loopholes, Congress revamped the generation-skipping transfer tax in 1986.106 The 1986 generation-skipping transfer tax (GSTT) taxes the transfer of property by gift of inheritance to a beneficiary two or more generations younger than the transferor and ensures that the grandchildren end up with the same value of assets that they would have had if the assets were transferred to them directly from their parents, rather than the grandparents.107 The GSTT serves the purpose of ensuring that estate taxes above the exemption are paid as if the transfer goes from decedent to decedent’s child to decedent’s grandchild even if the bequest goes from grandparent to grandchild.

Prior to the enactment of the GSTT, wealthy families could set up life estates for their children, grandchildren and great-grandchildren and effectively move wealth from generation to generation and not pay estate taxes.108 Congress intended that the GSTT preserve the estate tax base and wanted to ensure that the IRS could levy the estate tax at least once every generation on the deceased’s assets.109 The GSTT imposed a tax equal to the highest estate tax rate on generation-skipping transfers with an exemption per taxpayer.110 The GSTT exemption is currently $12.06 million for 2022 but is set to return to pre-2017 amounts of $5.45 million on January 1, 2026.111

After the enactment of the revised GSTT, lawyers funded trusts with GSTT exempt property and could avoid the transfer tax for the length of the duration of the trust.112 The Rule, as enacted by the states, guided this limitation on duration.113 Although there were three states that had abolished the Rule at the time Congress enacted the GSTT, estate planners and trust settlors did not regularly utilize perpetual trusts.114 However, after 1986, the state-by-state repeal of the Rule began115 and over half of the state legislatures have abolished or greatly limited the Rule in the following states: Alaska, Arizona, Delaware, Florida, Idaho, Illinois, Nevada, New Jersey, Ohio, Rhode Island, South Dakota, Utah, Washington, Wisconsin and Wyoming.116 And, without legislation specifically forbidding a perpetual trust, trust settlors and estate planners are permitted to create dynasty or perpetual trusts.117 If properly drafted and funded, a dynasty trust is exempt from the GSTT when beneficiaries die because the trust assets do not vest in the next generation. No trust settlor or estate will pay transfer tax until after the last beneficiary dies, which permits vast accumulation of wealth with no tax paid.118

III. PROBLEM: ESTATE TAX AND TAX HAVENS

A. ESTATE TAX AND THE RULE AGAINST PERPETUITIES

President Theodore Roosevelt said of estate taxes in 1906, “the prime object should be to put a constantly increasing burden on the inheritance of those swollen fortunes which is certainly of no benefit to this country to perpetuate.”119 One-hundred years later, there are cracks in the United States’ system of taxing inherited wealth.120 One of Congress’ intentions in enacting estate tax laws was to “break up large concentrations of wealth”121 but the amount of estate tax liability is decreasing.122 Less than 0.1 percent of the 2.8 million people expected to die in 2020 will file estate tax returns.123 The estate tax can both raise revenue and limit the amount of inherited wealth that is passed from generation to generation124 but “virtually any individual who invests sufficient time, energy, and money in tax avoidance strategies is capable of escaping the estate tax altogether.”125 Assuming that the estate and gift tax exemption drops in 2025, the estate tax liability is expected to increase to $55 billion by 2031.126

Congress controls the federal estate tax and seemingly it will wax and wane according to political opinion and how much revenue the federal government wants to raise by increasing or decreasing it. A seemingly bigger problem is the steady state-by-state repeal of the Rule. Many states have abolished the Rule without any reflection except to avoid estate tax and lure trust business.127 The repeal of the Rule seems to be at the forefront of loosening regulations around trusts, which has led to more than wealth accumulation.128 Over the last thirty years, South Dakota, in particular, has enacted laws and trust regulations that have rivaled some of the most popular foreign tax havens.129 South Dakota began the journey to becoming a financial powerhouse by enacting laws not seen in the rest of the United States.130 First, they enacted usury-friendly laws and abolished the Rule.131 Now, they continue to enact cutting-edge trust friendly laws including trust asset protection and privacy laws.132 When wealthy trust settlors discovered that perpetual trusts could significantly reduce estate transfer taxes, the South Dakota trust industry became a premier estate planning location and a trust parking place. The trust documents leaked as a part of the Pandora Papers came mostly from the South Dakota office of Trident Trust.133 However, South Dakota is just one of many states trying to lure foreign trust clients by changing banking and trust laws. Florida, Delaware, Texas and Nevada also had trust documents leaked in the Pandora Papers.134 However, South Dakota appears to be the weak link for trust regulation in the United States.135

Among wealthy countries, the United States ranks near the bottom in economic equality and intergenerational mobility.136 Any benefits from the expanding testamentary freedom such as dynasty trusts and the repeal of the Rule disproportionately flow to those with great wealth, thereby fostering growing economic inequality in the United States and the world.137 Dynasty trusts perpetuate the concentration of wealth by tying up trust assets and disallowing freely alienable control of such assets to vest into the hands of the trust settlors’ descendants.138 Scholars and historians have been vocal about the repeal of the Rule in the United States.139 “The Rule is one of the most under-celebrated social/legal innovations of all time, a signal death knell to the (considerable) remnants of feudalism in 17th century England.”140 However, notwithstanding the historical context and theory behind the Rule, most real-world dynasty trusts are not geared toward maximizing “dead-hand” control at the expense of the living, but toward minimizing taxes and protecting assets from would-be creditors.141 Each year, more states enact legislation that abolishes the Rule. In turn, this invites dynasty trust formation and appeals to foreign and domestic investors eager to escape accountability and find new tax havens for their wealth.142

B. THE TAX HAVEN PROBLEM

The United States has a problem with foreign and domestic tax avoidance, evasion and financial secrecy.143 Erica Hanichak, Government Affairs Director at the nonpartisan Financial Accountability and Corporate Transparency (FACT) Coalition, told lawmakers “The United States has become one of the most secretive jurisdictions in the world. This undesirable status harms average Americans, undermines national security, weakens democracy and erodes our tax base as well as other countries around the world.”144 For the last two decades, several states in the United States have successfully competed against foreign trust havens for business by allowing asset protection trusts and trust secrecy.145 The leaked documents in the Pandora Papers investigation reveal how foreign government officials, some accused of nefarious acts despite campaigning on anti-corruption platforms, have hidden their money via trusts settled in the United States.146 Notably, the Pandora Papers did not reveal evidence of tax evasion by these individuals.147 Nonetheless, wealthy individuals all over the world are plundering the wealth of their home nations, especially hurting the world’s most poor and vulnerable populations.148

Hidden domestic wealth systems, which include the vast use of dynasty trusts, empower criminals, deadbeats, and kleptocrats, by allowing them to thrive in perpetual secrecy.149 There is growing evidence that the U.S. has become a premiere destination for kleptocratic capital150 and has become one of the most utilized tax havens in the world.151 South Dakota trust laws appeal to foreigners because the Internal Revenue Code (IRC) does not tax foreign trusts on their foreign source income nor does the IRC tax foreign source income attributable to non-resident alien grantors or beneficiaries.152 IRC § 7701(a)(31)(B) defines a foreign trust as any trust that is not a domestic trust.153 More specifically, as long as substantial decisions controlling the trust are in the hands of non-U.S. persons and the trust does not have United States source income, the IRS would classify a trust settled in South Dakota as a foreign trust.154  Additionally, United States-based trusts have no registration requirements or central registries listing names of trustees, trust settlors or beneficiary identification.155

Congress created the Financial Crimes Enforcement Network (FinCEN) in 1990 to support federal, state, local and international law enforcement agencies in their fight against money laundering.156 Reporting requirements set forth in the Bank Secrecy Act provide a financial trail fore these agencies’ investigators.157 In response to the events of 9/11, the USA Patriot Act established FinCEN as a Treasury bureau.159 “Money laundering and terrorist financing are transnational crimes that can have devastating effects, involving severe economic consequences as well as loss of lives. The combating of these crimes demands not only effective U.S. interagency efforts but also concerted international cooperation.”160 After 9/11, banks successfully stopped terrorists, drug traffickers, and dictators by strengthening their due diligence procedures.161 Subsequently, wrongdoers have found other methods of hiding their money, which includes the United States trust industry.162

The United States has criticized off-shore or foreign tax havens for many decades.163 In an attempt to curb off-shore tax evasion, Congress enacted the Foreign Account Tax Compliance Act (FATCA) in 2010.164 FATCA requires financial firms around the world to report accounts held by U.S. citizens over $50,000 to the Department of Treasury.165 In the years following, the Treasury Department has negotiated intergovernmental agreements with foreign countries requiring that they turn data on United States’ citizens over to the United States.166 The Department of Treasury has compelled foreign financial institutions into complying by threatening penalties of up to thirty percent on their income from United States sources.167 However, the United States itself has yet to comply with FATCA as it has not yet provided the promised reporting reciprocity to its partner countries.168 Specifically, the United States has not agreed to the Common Reporting Standard required by the international organization “Organization for Economic Co-operation and Development” (OECD), which calls on jurisdictions across the world to obtain information from their financial institutions and exchange information annually with other jurisdictions.169 Congress has argued that joining the Common Reporting Standard and getting rid of FATCA would only benefit foreign financial institutions and United States tax authorities would not be informed of any accounts belonging to United States citizens living overseas.170 FATCA has been met with a lot of international criticism and the Department of Treasury has had difficulties with data collection and accuracy.171

IV. SOLUTION: ENACTING LEGISLATION AT THE FEDERAL LEVEL CLOSING TAX LOOPHOLES

A. ENACT THE ENABLERS ACT AND JOIN THE INTERNATIONAL COMMON REPORTING STANDARD

A bipartisan group of legislators have proposed the ENABLERS Act, a bill that requires trust companies, investment advisors, lawyers and art dealers to investigate foreign clients who desire to move money and assets into the United States financial system.172 If passed, the law would be the biggest money laundering reform enacted since 2001.173 “Modern dictatorship relies on access to the West. Lawyers, lobbyists, accountants, real estate professionals, consultants, and other enablers help kleptocrats and human rights abusers launder their money and reputations – and exert undue influence in democracies – in exchange for dirty money.”174 Tom Malinowski, a Democratic congressman from New Jersey who is a co-author to the bill, states, “if we make banks report dirty money but allow law, real estate and accounting firms to look the other way, that creates a loophole that crooks and kleptocrats can sail a yacht through. Our bill closes that loophole and encourages the administration to move in the same direction.”175 More recently, the push for Congress to pass the ENABLERS Act after Russia invaded the Ukraine has reached a fevered pitch.176 Most recently, even some of the most liberal tax havens are moving forward to end financial secrecy by proposing requirements that trust owners to identify themselves.177

If enacted, the ENABLERS Act will amend and expand provisions of the more than fifty year old Bank Secrecy Act,178 which requires banks to investigate clients and the source of their wealth, to include all the potential parties involved and not just banks.179 Imposing reporting requirements on the entirety of the money-laundering shadow world, increases the impact and is a major improvement in our ability to track money-laundering violations.180 Proponents state that the United States is in the last ten percent of countries that have not required non-financial businesses to participate in anti-money laundering obligations.181 Opponents believe this may solve the secrecy problem but that the reporting requirements would be a huge burden to small businesses.182

More than one hundred countries have joined the Common Reporting Standard.183 The United States should provide the same transparency internationally that it demands of other countries. As evidenced by the Pandora Papers, the United States has become a tax haven of choice for many foreigners hiding their money and neither the IRS nor home country governments are able to trace carefully structured trusts.184 Because the United States has not joined the Common Reporting Standard, the United States government has incentivized foreign capital to hide assets here.185

Congress should enact legislation to keep track of the money coming into the United States. There is a network of wealth advisors, attorneys, bankers and accountants who are paid millions to hide trillions with sophisticated networks of offshore and onshore bank accounts, anonymous shell companies, and dynasty trusts, which exist primarily in the United States.186 These activities sustain and protect domestic and foreign dynastic wealth and give rise to the powerful families whose wealth has made them household names.

B. REINSTATE A FEDERAL RULE AGAINST PERPETUITIES FOR GSTT EXEMPT TRUSTS

While it has been a long-standing belief that property rights are determined by the state, federal law should determine how such rights are taxed.187 A state’s legislature would seemingly have little interest in protecting the interests of the United States treasury.188 Historically, the Rule applied to trusts so that they could not last in perpetuity189 and when Congress passed the GSTT, most states had perpetuity laws that limited the life of the trust and, therefore, would limit the length of any GSTT exemption. Because of the subsequent repeal of the Rule in so many states, trust assets can be exempt from the GSTT for much longer than Congress ever intended. By enacting the GSTT in 1986, Congress unwittingly facilitated the movement toward perpetual trusts and has the primary responsibility for closing the loopholes.190 In 2005, Congress discussed the resulting GSTT tax exemption loophole and focused on the possibility of repealing the GSTT exemption.191 In 2012 and 2013, the Obama administration attempted to introduce legislation to put a ninety-year limit on the GSTT exemption with no success.192 The treasury stated that without a limit on the duration of trusts, the GSTT exemption was inconsistent with the purpose such exemption.193  However, a federal Rule would be a hard sell to a divided bipartisan Congress.194 Notably, such tax reforms were not included in the house approved version of the Build Back Better Act.195

IV. CONCLUSION

“[T]here is no single avenue affluent Americans use to avoid paying their tax bill; the arsenal of tools at their disposal is extensive and varied. Examined broadly, the tax code can resemble a block of Swiss cheese.”196 By allowing states to abolish the Rule and loosen trust regulations, we have seen the rise of American aristocracy, the allowance of wealth accumulation and perhaps an increase in America’s income inequality.197 The effect of repealing the Rule and the large GSTT exemption has had beneficial consequences for the wealthiest citizens in the United States and abroad.198 However, these consequences have not been great for everyone and may have worsened the income gap and inequality in the United States. The United States’ federal government should amend the GSTT to apply to each generation notwithstanding the existence of the dynasty trust.199 Specifically, Congress could impose a federal durational limit on trusts that take advantage of the GSTT exemption by requiring that those trusts only survive two generations or not beyond the common law Rule applicable period of lives in being plus 21 years.200 After which, the trusts must vest and be subject to federal taxation.

Over the last thirty years, the United States has turned into one of the largest tax havens in the world. “Sanctions don’t work if you can’t find their money … Our extremely lax laws enable them to hide it almost without a trace.”201 The United States government must promote transparency by passing global trade treaties that prohibit offshore evasion practices and investing in robust enforcement by enacting laws like the Enablers Act. Unless the United States can reverse this trajectory, we are on track to become a hereditary aristocracy of wealth, as the French economist Thomas Piketty has warned, where one generation from now, the sons and daughters of today’s billionaires will dominate our economy, politics, philanthropy, and culture.202 No matter what your politics are, unless you are in the billionaire club, this may not work out well for you.

  1. See generally Gary Smith, Summary of 50 State Rule Against Perpetuities Laws, NETLAW (July 10, 2017), https://step6.netlawinc.com/summary-50-state-rule-perpetuities-laws/
  2. The International Consortium of Investigative Journalist was founded in 1997 by Charles Lewis. As of 2022, the global member network includes 280 investigative journalists based in Washington, D.C. https://www.icij.org/about/corporate/
  3. See Emilia Díaz-Struck, Delphine Reuter, Agustin Armendariz, Jelena Cosic, Jesús Escudero, Miguel Fiandor Gutiérrez, Mago Torres, Karrie Kehoe, Margot Williams, Denise Hassanzade Ajiri and Sean McGoey (“Guardian Investigations Team”), Pandora Papers: An offshore data tsunami, Int’l Consortium of Investigative Journalists (Oct. 3, 2021), https://www.icij.org/investigations/pandora-papers/about-pandora-papers-leak-dataset/
  4. See Debbie Cenziper, Will Fitzgibbon and Salwan Georges, Pandora Papers: Suspect foreign money flows into booming American tax havens on promise of eternal secrecy, Int’l Consortium of Investigative Journalists, Oct. 4, 2021.
  5. Guardian Investigations Team, supra note 3.
  6. Id.
  7. Ryan Smith, Shakira, Claudia Schiffer Among Celebrities Named in Pandora Papers Leak, Newsweek, Oct. 4, 2021.
  8. Guardian Investigations Team, supra note 3.
  9. See Debbie Cenziper, Will Fitzgibbon and Salwan Georges, Foreign Money Secretly Floods U.S. Tax Havens. Some of It Is Tainted, Wash. Post, Oct. 4, 2021.
  10. See Hide Money in the US, Financial Tribune, Jan. 27, 2016 (quoting Trident Trust statement that their clients feel safer with their money parked in the US).
  11. Cenziper, supra note 9.
  12. Hiring Incentives to Restore Employment Act, H.R. 28847, 111th Cong. § 201 (2010); see also Jesse Drucker, The World’s Favorite New Tax Haven is the United States, Bloomberg Businessweek, Jan. 27, 2016.
  13. See Drucker, supra note 12.
  14. See Financial Secrecy Index – 2022 Results, Tax Justice Network, https://fsi.taxjustice.net; see Damian Shepherd, World’s Top Enabler of Financial Secrecy Is the United States, Bloomberg, May 16, 22 (finding that the US moved from second place to first place because of its refusal to exchange information with other countries’ tax authorities); see also Patrick Lalley, South Dakotans loved our state’s bank laws. But now the downside is clear, Wash. Post, Oct. 7, 2021 (stating that “the Pandora Papers make South Dakota look like Switzerland or the Cayman Islands”).
  15. Natasha Sarin, The Case for a Robust Attack on the Tax Gap, U.S. Dep’t of the Treas., (Sept. 7, 2021) (stating that the lost tax revenue is equal to three percent of the United States’ Gross Domestic Product or all the income taxes paid by the lowest earning ninety percent of taxpayers), https://home.treasury.gov/news/featured-stories/the-case-for-a-robust-attack-on-the-tax-gap; but see Oversight Subcommittee Hearing on the Pandora Papers and Hidden Wealth, 117th Congress, H. Comm. on Ways and Means, (Dec. 8, 2021) [hereinafter Hearings] (statement by Daniel Hemel, Professor, University of Chicago Law School, $163 billion circumvention likely overstated).
  16. See Jessie Eisinger, Jeff Ernsthausen and Paul Kiel, The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax, ProPublica, June 8, 2021, https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax (reporting on the tax strategies of billionaires such as Jeff Bezos, Warren Buffet and Elon Musk).
  17. See Id. (pointing out that the true tax rate of the richest Americans is only 3.4%).
  18. See Id. (stating that in 2011 Bezos reported a loss and even took a $4,000 child tax credit).
  19. See Greg Leiserson and Danny Yagan, What Is the Average Federal Individual Tax Rate on the Wealthiest Americans, White House Written Materials, Sept. 23, 2021 https://www.whitehouse.gov/cea/written-materials/2021/09/23/what-is-the-average-federal-individual-income-tax-rate-on-the-wealthiest-americans/  (estimating federal income tax paid by using IRS statistics, Survey of Consumer Finances and Forbes Magazine and including unsold stock).
  20. See Kate Dore, There’s a growing interest in wealth taxes on the super-rich. Here’s why it hasn’t happened, CNBC, April 9, 2022 https://www.cnbc.com/2022/04/09/theres-a-growing-interest-in-wealth-taxes-on-the-super-rich.html; but see Erica York, Summary of the Latest Federal Income Tax Data, 2022 Update, Tax Foundation, Jan. 20, 2022 (stating data demonstrates the U.S. individual income tax continues to be progressive and borne by highest income earners).
  21. See Flora v. United States, 362 U.S. 145, 176 (1960) (finding that the United States’ “system of taxation is based upon voluntary assessment and payment, not upon distraint).
  22. Jane G. Gravelle, Tax Havens: International Tax Avoidance and Evasion, Cong. Research Serv., R40623, at 1 (updated Jan. 6, 2022), https://sgp.fas.org/crs/misc/R40623.pdf (stating that the dividing line between tax avoidance and evasion is not clear).
  23. See Prem Sikka and Hugh Willmott, The Tax Avoidance Industry: Accountancy Firms on the Make,” Critical Persp. On Int’l Bus 415-443 (2013); see also Don Griswold, State Tax Havens in the Pandora Papers, Tax Notes State, Vol. 103, p. 407 (Jan. 24, 2022) (stating that enablers maintain that tax avoidance work can be done legally but that they share the offshore industry with unsavory bedfellows).
  24. Alan Rappeport, Tax cheats cost the U.S. $1 trillion per year, I.R.S. chief says, N.Y. Times, Apr. 13, 2021.
  25. See id. (noting that the rise in tax evasion likely from minimally regulated cryptocurrency sector).
  26. See The State of Tax Justice 2020: Tax Justice in the time of COVID-19, The Tax Justice Network at p. 5 (Nov. 2020), https://taxjustice.net/wp-content/uploads/2020/11/The_State_of_Tax_Justice_2020_ENGLISH.pdf (stating that almost every person in almost every country foots the bill incurred by tax abusers).
  27. See generally Baker v. Latham Sparrowbush Assoc., 808 F. Supp. 992, 1011 (1992) (explaining the history of the Rule and how the Rule applies to leaseholds); see e.g. Joel C. Dobris, Symposium: Trust Law in the 21st Century: Undoing Repeal of the Rule Against Perpetuities: Federal and State Tools for Breaking Dynasty Trusts, 27 Cardozo L. Rev. 2537 (2006); Stewart E. Sterk, Article: Jurisdictional Competition to Abolish the Rule Against Perpetuities: R.I.P. for the R.A.P., 24 Cardozo L. Rev. 2097 (2003); and Keith L. Butler, Notes & Comments: Long Live the Dead Hand: A Case for Repeal of the Rule Against Perpetuities in Washington, 75 Wash. L. Rev. 1237 (2000).
  28. Baker v. Latham Sparrowbush Assoc., 808 F. Supp. 992, 1011 (1992) (explaining the history of the Rule and how the Rule applies to leaseholds).
  29. John Chipman Gray, Rule Against Perpetuities, S. 201 (1942); Jesse Dukeminier and James E. Krier, The Rise of the Perpetual Trust, 50 UCLA L. Rev. 1303, 1304 (Aug. 2003).
  30. Rule Against Perpetuities, Black’s Law Dictionary (11th ed. 2019).
  31. John Chipman Gray, Rule Against Perpetuities, S. 201 (1942).
  32. Sarah A. Hinchliffe and B. Anthony Billings, R.I.P. RAP? Succession Planning in 2022 and Beyond, 175 Tax Notes Fed. 419 (2022) (discussing the “Modern” rule against perpetuities)..
  33. See Id.at 421 (breaking down each state’s position on interests held in perpetuity).
  34. Angela M. Vallario, Article: Death By A Thousand Cuts: The Rule Against Perpetuities, 25 J. Legis. 141, 156 (1993) (explaining how restricting beneficiaries from liquidating trust assets stops them from spreading their wealth).
  35. J.H.C. Morris & W. Barton Leach, The Rule Against Perpetuities 13-18 (2n ed. 1986); see also Sterk, supra note 27 at 2109; 6 American Law of Property 24.16 at 51 (A. James Casner ed., 1952) (stating that the Rule permits “a man of property… (to) provide for all of those in his family whom he personally knew and the first generation after them upon attaining majority”).
  36. Robert H. Sitkoff, Teaching Trusts and Estates: Trusts and Estates: Implementing Freedom of Disposition, 58 St. Louise L.J. 643, 667 (2014) (explaining that the federal wealth transfer tax is the most important contemporary limitation on freedom of property disposition).
  37. Arundel Corp v. Marie, 860 A.2d 886 (Md. 2004).
  38. Lewis M. Simes, Public Policy and the Dead Hand at p. 59–60 (1955).
  39. Max M. Schanzenbach and Robert H. Sitkoff, Symposium, Trust Law in the 21st Century: Perpetuities or Taxes? Explaining the Rise of the Perpetual Trust, 27 Cardozo L. Rev. 2465, 2472-73 (explaining that the Rule’s reform movement culminated with the USRAP); W. Barton Leach, Perpetuities in Perspective: Ending the Rule’s Reign of Terror, 65 Harv. L. Rev. 721, 746 (1952) (stating dissatisfaction with the Rule’s complexities, absurd assumptions and booby traps).
  40. See Unif. Statutory Rule Against Perpetuities, 8B U.L.A. 223 (2001 & 2012 Supp.) [hereinafter USRAP]; see also John G. Shively, Note, The Death of the Life in Being – The Required Federal Response to the State Abolition of the Rule Against Perpetuities, 78 Wash. U. L. Q. 371, 380-81 (2000) (setting forth detailed criticisms of the Rule).
  41. See USRAP, supra note 40 at § 1(a)(2).
  42. See Grayson M. P. McCouch, Who Killed the Rule Against Perpetuities?, 40 Pepp. L. Rev. Iss. 5, at 1304 (2013).
  43. See Id.
  44. See, e.g., Ariz. Rev. Stat. Ann. § 14-2901 (2022) (500 years); Colo. Rev. Stat. § 15-11- 1102.5 (2022) (1000 years); Fla. Stat. § 689.225 (2012) (360 years); Utah Code Ann. § 75-2-1203 (2012) (1000 years).
  45. See generally Hinchliffe, supra note 32 (discussing each state’s current position with the rule against perpetuties).
  46. See e.g. Cal. Prob. Code § 21200 (California); Ark. Code Ann. § 18-3-101 (2020) (Arkansas); Conn. Gen. Stat. § 45a-491 (2020) (Connecticut); D.C. Code § 19-901 (2020) (District of Columbia); and Ga. Code Ann. § 44-6-200 (2018) (Georgia).
  47. See Robert T. Danforth, Rethinking the Law of Creditors’ Rights in Trusts, 53 Hastings L. J. 287, 290 (2002) (setting forth basic trust law concepts).
  48. See id.; but see Al W. King III, Trusts Without Beneficiaries – What’s the Purpose?, Wealth Management.com, Feb. 02, 2015 (discussing non-charitable purpose trusts, which do not have beneficiaries and are used for estate planning in South Dakota).
  49. Ralph M. Engel and Al W. King III, The Ultimate Estate Planning Vehicle: The Dynasty Trust, CPA Journal (1996) (explaining how a trust can be established perpetually in certain states without the rule against perpetuities).
  50. See I.R.C. § 1(e), Part 1 of Subchapter J.
  51. See I.R.C. §§ 671-662.
  52. See I.R.C. § 6012(a)(4).
  53. See I.R.C. § 6034A(a).
  54. Internal Revenue Service, Abusive Trust Tax Evasion Schemes – Talking Points (Section IV) [hereinafter IRS Talking Points]; https://www.irs.gov/businesses/small-businesses-self-employed/abusive-trust-tax-evasion-schemes-talking-points (last updated Apr. 20,2021) (stating that trust uses include estate planning, charitable transfer of assets and holding assets for a minor or those who cannot handle their financial affairs).
  55. See IRS Tax and Earned Income Credit Tables https://www.irs.gov/pub/irs-pdf/i1040tt.pdf; https://www.irs.gov/pub/irs-prior/f1041es–2021.pdf
  56. IRS Talking Points, supra note 54.
  57. Daniel Hemel, South Dakota’s tax avoidance schemes represent federalism at its worst, Wash. Post. (Oct. 7, 2021) (pointing out that “from a broad policy perspective” allowing out-of-state residents to reduce tax liabilities “is certifiably crazy”).
  58. See generally Eric Kades, Article, Of Piketty and Perpetuities: Dynastic Wealth in the Twenty-First Century (and Beyond), 60 B.C. L. Rev. 145 (2019).
  59. See generally McCouch, supra note 42 at 1292 (explaining that the Rule is the last remaining obstacle for perpetual exemption from transfer taxes).
  60. See Sean H. Vanatta, Citibank, Credit Cards, and the Local Politics of National Consumer Finance, 1968-1991, 90(1) Bus Hist. Rev. (Spring 2016) (explaining that the Supreme Court’s ruling in 1978 case set the stage for states to change usury laws); see generally Marquette Nat’l Bank of Minn. v. First of Omaha Service Corp., 439 U.S. 299 (1978) (holding that state anti-usury laws regulating interest rates cannot be enforced against nationally chartered banks based in other states).
  61. Oliver Bullough, The great American tax haven: why the super-rich love South Dakota, Guardian, Nov. 14, 2019.
  62. Vanatta, supra note 60.
  63. Id.
  64. See Marcus Lu, Charted: U.S. Consumer Debt Approaches $16 Trillion, Visual Capitalist, May 4, 2022.
  65. S.D. Codified Laws § 43-5-8 (2020); see also Al W. King, III and Pierce H. McDowell, III, Article, A Bellwether of Modern Trust Concepts: A Historical Review of South Dakota’s Powerful Trust Laws, 62 S.D. L. Rev. 266, 267 (2017) (explaining that the South Dakota law codified the 1979 case of Murphy v. Comm’r, 71 T.C. 671 (1979)).
  66. State of South Dakota Office of the Governor Executive Order 97-10 https://dlr.sd.gov/banking/trusts/trust_task_force_documents/executive_order_97_10.pdf; see generally King, supra note 65 (reviewing the history of South Dakota’s trust laws).
  67. South Dakota Dept. of Labor & Regulation, Banking – Governor’s Task Force on Trust Administration Review and Reform (most recently updated 2017), https://dlr.sd.gov/banking/trusts/trust_task_force_documents/executive_order_2017_08.pdf.
  68. Howard Gleckman, South Dakota Turned Itself into a Tax Haven. But Why?, Forbes, Oct. 21, 2021; but see Hearings, supra note 15 (statement from Beverly Moran explaining how foreigners use United States trust law to avoid taxes in their home countries and in the United States).
  69. Tax Foundation State Income Tax Rates, updated Feb. 15, 2022 https://taxfoundation.org/state-income-tax-rates-2022/ (setting forth that South Dakota is one of seven states with no state income tax); see generally Robert H. Sitkoff and Max M. Schanzenbach, Jurisdictional Competition for Trust Funds: An Empirical Analysis of Perpetuities and Taxes, 115 Yale L. J. 356 (2005) (comparing different states’ trust legislation).
  70. S.D. Codified Laws § 55-1-41; see also In re Cleopatra Cameron Gift Trust, 931 N.W.2d 244, 251 (noting that the South Dakota legislature has placed barriers between creditors and trust funds protected by a spendthrift provision); see also Dobris, supra note 27 at 2539 (stating that perpetual trusts along with asset protection trusts are a toxic combo).
  71. S.D. Codified Laws § 55-1-20; see also Hearings, supra note 15 (statement from Beverly Moran discussing purpose trusts); see also Jennifer E. Levy, Comment: Idaho’s Noncharitable Purpose Trust Statute: Leaping Over Age-Old Trust Laws in a Single Bound, 44 Idaho L. Rev. 801, 818-19 (2008) (examining and comparing states’ purpose trust statutes).
  72. See Daniel Scott, Why You Should Consider Using a ‘Purpose’ Trust for Your Legacy Plan, Forbes, May 14, 2018 (explaining that a purpose trust exists to carry out a purpose as opposed to a trust that exists for the benefit of one ore more beneficiaries).
  73. See King, supra note 48 (setting forth examples of purpose trusts).
  74. Id. (setting forth examples of states that allow purpose trusts including South Dakota); see also South Dakota Trust Company llc, https://sdtrustco.com/why-south-dakota/ [hereinafter South Dakota Trust] (stating that, in fact, South Dakota is one of a few states that allow for purpose trusts to be established for any lawful purpose).
  75. David Wiltse and Filip Viskupič, South Dakota’s wealth is in finance. South Dakotans still think it’s in farming Wash. Post; see generally Kalena Thomhave and Chuck Collins, Dynasty Trusts: How the Wealthy Shield Trillions from Taxation Onshore, Inequality.org, June 2021 (suggesting that South Dakota trust assets may be much more than what is disclosed).
  76. See South Dakota Dept. of Labor & Regulation, https://dlr.sd.gov/banking/licensed_providers/state_chartered_trust_companies.pdf.
  77. See Cenziper, supra note 9 (explaining that the Pandora Papers uncovered trusts that held assets connected to people or companies accused of fraud, bribery and human rights abuses); see also Anders Melin, The Word’s Rich and Powerful are Stashing $500 Billion in this Tax Haven, Bloomberg Wealth, Oct. 14, 2021 (explaining the rise of the South Dakota trust industry).
  78. See Kara Scannell and Vanessa Houlder, U.S. Tax Havens: The New Switzerland, Financial Times, May 8, 2016 (explaining the rise in on-shore tax havens).
  79. See generally South Dakota Trust, supra note 74.
  80. Id.; see also Schanzenbach, supra note 39 at 2479 (stating that South Dakota trust practitioners have “enjoyed a substantial increase in trust business since 1986″).
  81. See South Dakota Trust, supra note 74(stating that one of the SDTC founders, Pierce McDowell is also a member of the South Dakota’s trust task force, which keeps South Dakota’s trust laws friendly for business).
  82. South Dakota Trust, supra note 74.
  83. See Wiltse, supra note 75 (discussing a poll taken in October 2020 of registered voters in South Dakota); see also Bureau of Economic Analysis, U.S. Department of Commerce, Regional Data – South Dakota.
  84. See Scannell, supra note 78 (stating that in 2015, South Dakota collected $1.79 million from trust companies, which was a small factor in the $4.3 billion state budget).
  85. See Lalley, supra note 14 (quoting Sen. Gene Abdallah regarding South Dakota trust regulation changes in 2007, “Nobody understands any of them”).
  86. See Schanzenbach, supra note 39 at 2467-68; see also McCouch, supra note 42 at 1302.
  87. See Hearings, supra note 15.
  88. Lawrence M. Friedman, The Dynastic Trust, 73 Yale L. J. 547, 547-48 (1964) (explaining that the term dynasty trust means a “trust set up primarily to perpetuate the trust estate for as long a period as possible” by way of “a chain of life interests”).
  89. See Vallario, supra note 34 at n. 10 (tying Delaware dynasty trusts to avoidance of transfer taxes); see generally Lawrence M. Friedman, The Dynastic Trust, 73 Yale L. J. 547, 549 (1964).
  90. Al W. King III, Trusts Without Beneficiaries – What’s the Purpose?, Wealth Management.com, Feb. 02, 2015 (setting forth examples of states that allow NCPs with broad purposes, including South Dakota); see also South Dakota Trust, supra note 74 (stating that, in fact, South Dakota is one of a few states that allow for purpose trusts to be established for any lawful purpose).
  91. Kades, supra note 58 (listing states that have greatly limited the Rule); see also Steven J. Horowitz and Robert H. Sitkoff, Symposium: The Role of Federal Law in Private Wealth Transfer: Unconstitutional Perpetual Trusts, 67 Vand. L. Rev. 1769, 1785 (Nov. 2014) (listing states that allow perpetual or effectively perpetual trusts in 2013).
  92. See Hemel, supra note 57(arguing that without Congress’ intervention, states have found ways to sidestep the tax code).
  93. The Revenue Act of 1916 (39 Stat. 756).
  94. Internal Revenue Code, Estate Tax, https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes.
  95. Susan K. Hill, Comment, Leaping Before We Look? Repeal of the State Estate Tax Credit and the Consequences for States, Americans, and the Federal Government, 32 Pepp. L. Rev. 151, 158 (2004) (stating that the estate tax has always been controversial and subject of political debate); see also Krisanne M. Schlacter, Repeal of the Federal Estate and Gift Tax: Will It Happen and How Will It Affect Our Progressive Tax System?, 19 Va. Tax Rev. 781, 786 (2000) (noting that in the 1990s, popular opinion favored repeal of the estate tax).
  96. Derek Thompson, The Very Bad Arguments for Killing the Estate Tax, The Atlantic, Nov. 13, 2017 (setting for arguments for and against the estate tax).
  97. Jacob Pramuk, Bernie Sanders introduces bills to hike taxes on corporations and the wealthiest Americans, CNBC Politics, Mar. 25, 2021 (setting forth Sanders plan to start with a levy of 45% on estates valued between $3.5 million and $10 million).
  98. See Scott Drenkard and Richard Borean, Does Your State Have an Estate or Inheritance Tax?, Tax Found., May 5, 2015.
  99. See Andrew Lundeen, The Estate Tax Provides Less than One Percent of Federal Revenue, Tax Found., Apr. 7, 2015, https://taxfoundation.org/estate-tax-provides-less-one-percent-federal-revenue/, (stating that due to the increasing exemption, a very small number of estates actually pay the tax); see also Thompson, supra note 96 (setting for arguments for and against the estate tax).
  100. See Bob Lord, Dynasty Trusts: Giant Tax Loopholes that Supercharge Wealth Accumulation, Americans for Tax Fairness, at 7 (Feb. 2022) (discussing the rise and decline of the estate tax).
  101. See The Tax Policy Center’s Briefing Book, Key Elements of the U.S. Tax System, Table 1, Number of Estate Tax Returns and Tax Liability 2001, 2007-2020.
  102. See Sterk, supra note 27 at 2100.
  103. See Sterk, supra note 27 at n. 13 (2003) (noting examples of how estates would only be taxed at the direct descendent level).
  104. See Tax Reform Act of 1976, Pub L. No. 94-455, Section 2006(a), 90 Stat. 1520 (1976).
  105. See I.R.C. § 2611(a)(1) (1976).
  106. Leonard Levin and Michael Mulroney, The Rule Against Perpetuities and the Generation-Skipping Tax: Do We Need Both?, 35 Vill. L. Rev. 333, 351 (1990) (setting forth history of transfer taxes).
  107. I.R.C. § 2601. The current version of the Generation Skipping Tax was enacted in 1986, replacing the original version enacted in 1976. See Tax Reform Act of 1986, Pub. L. 99-514 ss 1431-33, 100 Stat. 2085, 2717 (1986).
  108. See Tax Reform Act of 1976, Pub. L. No. 94-455, 2006, 90 Stat. 1520, 1879-90 (1976); see also Shively, supra note 40 at 372 (noting that Congress adopted the 1976 generation-skipping transfer tax to be able to tax wealth at least once in each generation).
  109. See Staff of Joint Comm. On Taxation, 99th Cong., 2d Sess., General Explanation of the Tax Reform Act of 1986, at 1263 (comm. Print 1987) (discussing purpose of GSTT).
  110. See Mark E. Powell, The Generation-Skipping Transfer Tax: A Quick Guide, J. of Acct. (Sept. 30, 2009), https://www.journalofaccountancy.com/issues/2009/oct/20091804.html (summarizing the GSTT).
  111. 115 P.L. 97, 131 Stat. 2054, 2017 Enacted H.R. 1, 115 Enacted H.R. 1; see also Internal Revenue Service Tax Reform: Estate and Gift Tax FAQs, https://www.irs.gov/newsroom/estate-and-gift-tax-faqs, (explaining that the basic exclusion amount doubled for tax-years 2018 through 2025 and reverts to pre-2018 levels of $5 million); see also Jay A. Soled, Article, The Federal Estate Tax Exemption and the Need for Its Reduction, 47 Fla St. U.L. Rev. 649, 675 (2020) (arguing that while the GSTT is at historic highs, millions of dollars are safeguarded).
  112. See Kent D. Schenkel, Article: Exposing the Hocus Pocus of Trusts, 45 Akron L. Rev. 63, 111 (2012) (stating that the Rule was “an anathema to transfer tax avoidance”).
  113. Id.
  114. Idaho Code § 55-111 (2020); S.D. Codified Laws § 43-5-1, 43-5-8 (1983); Wis. Stat. Ann. § 700.16 (West 2001); see also Schanzenbach, supra note 39 at 2487 (explaining that South Dakota did not have an increase in trust business between 1983, the year South Dakota abolished the Rule, and 1986, the year the U.S. Congress enacted the GSTT); see also Dukeminier, supra note 29 at 1313.
  115. I.R.C. § 2601. The current version of the Generation Skipping Tax was enacted in 1986, replacing the original version enacted in 1976. See Tax Reform Act of 1986, Pub. L. 99-514 ss 1431-33, 100 Stat. 2085, 2717 (1986); see also Dukeminier, supra note 29 at 1304-17 (explaining that when Congress enacted the GSTT, it probably assumed most states would continue to adhere to the rule against perpetuities); see also Schanzenbach, supra note 39 at 2467-68 (weighing evidence that the generation skipping tax enactment influenced the movement to abolish the Rule); Ira Mark Bloom, The GST Tax Tail Is Killing the Rule Against Perpetuities, 87 Tax Notes 569 at 7 (arguing that states are not seriously considering negative consequences of sanctioning GSTT perpetual trusts).
  116. See Kades, supra note 58 at 147 (surveying the states that have abolished or severely limited the Rule).
  117. See Vallario, supra note 34 at 148.
  118. See William J. Turnier and Jeffery L. Harrison, Article, A Malthusian Analysis of the So-Called Dynasty Trust, 28 Va. Tax Rev. 779, 782 (2009) (setting forth scenarios where no estate tax is paid in states without the Rule); see also Brian Layman, Comment, Perpetual Dynasty Trusts: One of the Most Powerful Tools in the Estate Planner’s Arsenal, 32 Akron L. Rev. 747, 748 (1999) (explaining dynasty trusts as a powerful estate planning tool).
  119. See Taxhistory.org, The Income Tax Arrives http://www.taxhistory.org/www/website.nsf/Web/THM1901; Louis Eisenstein, The Rise and Decline of the Estate Tax, 11 Tax L. Rev. 223, 229 (1956).
  120. See Robin Kaiser-Schatzlein, This Is How America’s Richest Families Stay That Way, N.Y. Times, Sept. 24, 2021 (stating that the lack of estate tax reform is a result of fastidious lobbying by those with the case to create a skewed debate); see generally Brenda Medina, How the world’s richest defend their wealth, with help from a dedicated industry, International Consortium of Investigative Journalists, June 1, 2021; see also Julie Hirschfeld Davis and Kate Kelly, Two Bankers Are Selling Trump’s Tax Plan. Is Congress Buying?, N.Y. Times, Apr. 28, 2017 (quoting Gary D. Cohn, then director of the National Economic Council, “only morons pay the estate tax”).
  121. S. Rep. No. 97-144, at 124 (1981), as reprinted in 1981 U.S.C.C.A.N. 105, 226.
  122. See Tax Policy Center, Key Elements of the U.S. Tax System, https://www.taxpolicycenter.org/briefing-book/how-many-people-pay-estate-tax.
  123. See Id.
  124. I.R.C. § 2001 (current through Pub. L. 117-80, approved December 27, 2021); see also Lee Anne Fennell, Death, Taxes and Cognition, 81 N.C. L. Rev. 567, 572 (2003).
  125. See U.S. Joint Econ. Comm., The Economics of the Estate Tax, 98-J-842-48, at 46 (Sup. Doc. Y4.EC7:EF8) (1998) (arguing that the estate tax avoidance options permits an unfair tax burden).
  126. See Congressional Budget Office, Understanding Federal Estate and Gift Tax, June 2021 (explaining that estate tax revenues will rise sharply after 2025), https://www.cbo.gov/publication/57272#_idTextAnchor019; see also https://www.statista.com/statistics/217518/revenues-from-estate-and-gift-tax-and-forecast-in-the-us/#:~:text=In%202020%2C%20the%20revenue%20from,comparison%20to%20the%20previous%20year.
  127. See Dukeminier, supra note 29 at 1317 (stating that reformers would have confronted considerable difficulties to abolish the Rule without the GSTT).
  128. See Don Griswold, State Tax Havens in the Pandora Papers, Tax Notes State, Vol. 103, p. 410 (Jan. 24, 2022).
  129. Howard Gleckman, South Dakota Turned Itself into a Tax Haven. But Why?, Forbes, Oct. 21, 2021.
  130. Fitzgibbon, supra note 9.
  131. SD Codified Laws 43-5-8 (2020) (amended in 1983); see also Al W. King, III and Pierce H. McDowell, III, Article, A Bellwether of Modern Trust Concepts: A Historical Review of South Dakota’s Powerful Trust Laws, 62 S.D. L. Rev. 266, 267 (2017) (explaining that the South Dakota law codified the 1979 case of Murphy v. Comm’r, 71 T.C. 671 (1979)).
  132. Bullough, supra note 61 (explaining that South Dakota is a popular place for wealthy to hide their money because of the trust asset protection laws and lack of any state income, inheritance or capital gains tax).
  133. Fitzgibbon, supra note 4.
  134. Id.
  135. See David Pegg and Dominic Rushe, Pandora papers reveal South Dakota’s role as a $367 billion tax haven, The Guardian, Oct. 4, 2021.
  136. Corak, Miles, Income Inequality, Equality of Opportunity, and Intergenerational Mobility, J. of Econ. Persps, Vol. 27: p. 79, 80 (2013).
  137. Palma Joy Strand, Inheriting Inequality: Wealth, Race, and the Laws of Succession, 89 OR L. Rev. 453, 460 (2010); Robin Kaiser-Schatzlein, This Is How America’s Richest Families Stay That Way, N.Y. Times, Sept. 24, 2021.
  138. See Vallario, supra note 34 at 156 (arguing that repeal of the rule keeps power and wealth from being acquired and/or distributed to others).
  139. See e.g. Dobris, supra note 27; Dukeminier, supra note 29; but see Butler, supra note 27.
  140. Eric Kades, A New Feudalism: Selfish Genes, Great Wealth and the Rise of the Dynastic Family Trust (“DFT”), SSRN Electronic Journal (Feb. 4, 2021).
  141. See generally Sterk, supra note 27 (blaming the GSTT for the change in the rule against perpetuities); Verner F. Chaffin, Article, Georgia’s Proposed Dynasty Trust: Giving the Dead Too Much Control, 35 Ga. L. Rev. 1, 26 (2000) (arguing that the dynasty trust’s principal function is to exploit GSTT); Ira Mark Bloom, The GST Tail Is Killing the Rule Against Perpetuities, Tax Notes at 569 (Apr. 24, 2000).
  142. Sterk, supra note 27; see also Hearings, supra note 15 (statement by Beverly Moran describing domestic tax haven development as a race to the bottom).
  143. Hearings, supra note 15 (statement by Erika Hanichak).
  144. Will Fitzgibbon and Debbie Cenziper, Pandora Papers: American lawmakers denounce South Dakota, other US states as hubs for financial secrecy, Int’l Consortium of Investigative Journalists, Dec. 8, 2021, https://www.icij.org/investigations/pandora-papers/american-lawmakers-denounce-south-dakota-other-us-states-as-hubs-for-financial-secrecy/
  145. Reid K. Weisbord, Article, A Catharsis for U.S. Trust Law: American Reflections on the Panama Papers, 116 Colum L. Rev. Online 93, 98 (2016) (discussing how asset protection trusts and privacy laws attract foreign trust business).
  146. Guardian Investigations Team, supra note 3; see also Erin Cunningham and Ellen Francis, Pandora Papers: Leaks prompt investigations in some countries – and denial in others, Wash. Post, Oct. 9, 2021 (reporting that associates of both Russian President Vladimir Putin and Ukrainian President Volodymyr Zelensky have associates named in the Pandora Papers).
  147. See Fitzgibbon, supra note 9 (stating that with little transparency in the industry, it is impossible to determine whose money is being managed).
  148. Id.; see generally U.S. White House, “United States Strategy on Countering Corruption,” Dec. 6, 2021.
  149. See Thomhave supra note 75.
  150. See generally Casey Michel, American Kleptocracy: How the U.S. Created the World’s Greatest Money Laundering Scheme in History (St. Martin’s Press, 2021) (arguing that the U.S. is now the center of global offshoring; see also Thomhave, supra note 75 (accusing wealthy individuals of moving money to the U.S. to escape accountability); but see Lalley, supra note 14 (noting that Pandora Papers did not uncover a direct line from illegal activities to a South Dakota trust).
  151. Tax Justice Network, Financial Secrecy Index – 2020 Results, https://fsi.taxjustice.net/en/introduction/fsi-results).
  152. Hearings, supra note 15 (statement by Beverly Moran explaining how foreigners use United States trust law to avoid taxes in their home countries and in the United States).
  153. IRC § 7701(a)(30)(E) (defining a domestic trust as having to have the following two elements: (i) a United States court can exercise primary supervision over the administration of the trust; (ii) One or more United States persons have the power to control all substantial decisions of the trust).
  154. See U.S. Treasury Regulation 301.7701-7(d)(ii); see also Joan K. Crain, Darcy L. Roennfeldt and Myriam Soto, U.S. Trusts for Global Families: Panacea or Problem?, BNY Mellon Wealth Management, Jan. 2021, https://www.bnymellonwealth.com/assets/pdfs-strategy/thought_ustrustsforglobalfamilies_f.pdf.
  155. Hearings, supra note 15 (statement by Beverly Moran that trusts are easy to hide because they exist in lawyers’ offices without the the benefit of public registers).
  156. FinCEN established in April 1990 by Treasury Order Number 105-08.
  157. Federal Deposit Insurance Act, 91 Pub. L. 508, 84 Stat. 1114 (1970).
  159. See generally Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of 2001,107 P.L. 56, 115 Stat. 272 (2001).[/efn-note] The stated purpose of the USA Patriot Act is “to deter and punish terrorist acts in the United States and around the world, to enhance law enforcement investigatory tools, and for other purposes.”158See generally Id.
  160. See United States Government Accountability Office, International Financial Crime: Treasury’s Roles and Responsibilities Relating to Selected Provisions of the USA PATRIOT Act (May 12, 2006), https://www.govinfo.gov/content/pkg/GAOREPORTS-GAO-06-483/html/GAOREPORTS-GAO-06-483.htm.
  161. Will Fitzgibbon, US lawmakers call for crackdown on financial ‘enablers’ after Pandora Papers, Int’l Consortium of Investigative Journalists, Oct. 7, 2021.
  162. Id.
  163. FRONTLINE PBS, “Pandora Papers,” Nov. 9, 2021 (reporting on the Pandora Papers leaked documents).
  164. Hiring Incentives to Restore Employment Act, H.R. 28847, 111th Cong. Section 201 (2010) Congress intended FATCA to be the revenue portion of the 2010 domestic stimulus bill, the Hiring Incentives to Restore Employment Act (HIRE); Int’l Tax Review, Chapter 4 of the FATCA: Implementation Issues, Q&A, BrightTALK (Dec. 16, 2010).
  165. I.R.C. §§ 1471-74. Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, Section 501(a), 124 Stat. 71, 97-106 (2010). Sections 501-41 of the HIRE Act are often referred to as the Foreign Account Tax Compliance Act (FATCA).
  166. Michael Cohn, IRS seeing difficulties with FATCA reporting, Accounting Today, Apr. 1, 2019.
  167. Id.
  168. Mark Whitehouse, Clive Crook, The U.S. Is a Hypocrite on Global Financial Crime: Editorial, Bloomberg Law (Oct. 15, 2021) (stating that Congress has denied the Treasure Department the authority to collect information on foreigners’ balances held in U.S. bank accounts).
  169. James F. Kelly, Note and Comment: International Tax Regulation by United States Fiat: How FATCA Represents Unsound International Tax Policy, 34 Wis. Int’l L.J. 981, 1016 (2017) (noting that no state other than the U.S. receives any real positive benefit from FATCA); see also Implementation Handbook: Standard for Automatic Exchange of Financial Information in Tax Matters (2d edition 2018), OECD https://www.oecd.org/tax/exchange-of-tax-information/implementation-handbook-standard-for-automatic-exchange-of-financial-information-in-tax-matters.pdf; Noam Noked, Should the United States Adopt CRS?, Mich. L. Rev. Online 118 (2019) (stating that U.S. financial institutions report little to no information about foreigners holding financial accounts in the United States).
  170. See Cristian Angeloni, US will not swap Fatca for common reporting standard, International Adviser, Apr. 9, 2019, https://international-adviser.com/us-will-not-swap-fatca-for-common-reporting-standard/ (explaining that Fatca puts the compliance burdens on foreign financial institutions, something they wouldn’t need to do if the U.S. adopted the Common Reporting Standard).
  171. Michael Cohn, IRS seeing difficulties with FATCA reporting, Acct. Today, Apr. 1, 2019.
  172. H.R. 5525 – ENABLERS Act, 117th Congress (2021-2022) (Introduced 10/08/2021); Will Fitzgibbon, US lawmakers call for crackdown on financial ‘enablers’ after Pandora Papers, Int’l Consortium of Investigative Journalists (stating proposed legislation would be most significant reform since 9/11).
  173. See Will Fitzgibbon, House panel approves expanding money laundering reporting requirements, Wash. Post, June 23, 2022 (explaining that the House Armed Services Committee voted to include Enablers Act in Defense Authorization Act, which is a bill traditionally passed by Congress every year).
  174. Enabling Kleptocracy, Commission on Security and Cooperation in Europe, Caucus Against Foreign Corruption and Kleptocracy, September 29, 2021, https://www.csce.gov/international-impact/events/enabling-kleptocracy.
  175. Press Release, Representatives Malinowski, Salazar, Cohen and Wilson Introduce Bipartisan Legislation to Stop Enablers of International Corruption (Oct. 6, 2021).
  176. See Debbie Cenziper, Will Fitzgibbon, Emily Anderson Stern, Michael Korsh and Alice Crites, The gatekeepers who open Americn to oligarchs and scammers, Wash. Post, Apr. 5, 2022 (explaining how registered agents of shell companies should be included in reporting requirements); see also Elena Loginova, Pandora Papers Reveal Offshore Holdings of Ukrainian President and his Inner Circle, Organized Crime and Corruption Reporting Project, Oct. 3, 2021 (arguing that President Zelensky capitalized on public anger toward corruption but may be involved in similar corrupt acts).
  177. See Debbie Cenziper, Eva Herscowitz and Will Fitzgibbon, Lawmakers push to uncover riches shielded by state secrecy laws, Wash. Post, Apr. 21, 2022 (explaining that Alaska, New York and Wyoming are considering new reforms).
  178. Bank Secrecy Act, Pub. L. No. 91-508, 84 Stat. 1121 (1970).
  179. See Dominic Rushe, US proposes crackdown on financial “enablers” in wake of Pandora Papers, The Guardian, Oct. 8, 2021.
  180. See Poppy Alexander, Enablers Act will do more to stop money laundering than lawmakers realize, The Hill, Oct 14, 2021.
  181. Hearings, supra note 15 (statement from Erica Hanichak setting forth arguments for more government regulation).
  182. Id. (statement from David R. Burton finding that including small businesses in compliance requirements would bureaucratize more and more transactions making them very cumbersome)
  183. https://www.oecd.org/tax/automatic-exchange/commitment-and-monitoring-process/AEOI-commitments.pdf.
  184. See Whitehouse, supra note 168.
  185. See Robert Goulder, Should the U.S. Adopt the OECD’s Common Reporting Standard, Forbes, June 29, 2016.
  186. See generally Chuck Collins, The Wealth Hoarders: How Billionaires Pay Millions to Hide Trillions (Polity, 1st ed. 2021).
  187. See Morgan v. Commissioner, 309 U.S. 78 (1940).
  188. See Hinchliffe, supra note 32 (discussing the federal GSTT exemption relied on the Rule to control the length of trusts).
  189. Frederick Vierling, The Rule Against Perpetuities Applied to Trusts, 9 St. Louis L. Rev. 286 (1924) (explaining that private trusts’ length may not be unlimited).
  190. Lawrence W. Waggoner, From Here to Eternity: The Folly of Perpetual Trusts, Univ. of Mich. L. Sch. Pub. L. and Legal Theory Research Paper Series, Paper No. 259 (Apr. 2013, Rev. July 2016) (setting forth reasons why to abolish perpetual trusts unrelated to estate tax).
  191. See Staff of Joint Comm. on Taxation, 109th Cong, Options to Improve Tax Compliance and Reform Tax Expenditures, at 392-95 (Joint Comm. Print 2005) (singling out the dynasty trust as one of the abuses)..
  192. See U.S. Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals 81-82 (2012) (proposing a ninety-year limit on GST exemption), U.S. Dep’t of the Treasure, General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals 129-130 (2011).
  193. See U.S. Dep’t of the Treasury, General Explanations of the Administration’s Fiscal Year 2013 Revenue Proposals 81-82 (2012).
  194. See generally Lawrence W. Waggoner, Effective Curbing the GST Exemption for Perpetual Trusts, 135 Tax Notes 1267, 1267 (2021).
  195. H.R. 5376 Build Back Better Act, 117th Congress (2021-2022).
  196. Bill Pascrell, Jr., Opinion, Swiss Cheese’ Tax Code Loophole Language Could Use an Overhaul, Bloomberg Law, Mar. 25, 2022.
  197. See generally Waggoner, supra note 194.
  198. Kades, supra note 58 at 146 (realizing that with no Rule and no estate tax there are no obstacles to creating large pools of dynastic wealth).
  199. Hearings, supra note 15 (statement from David R. Burton noting that this change to the GSTT was proposed in 2005 and that the angst about trusts and transparency is a smoke screen).
  200. See Waggoner, supra note 194 (setting forth instructions for Congress to close tax loophole); but see Dennis I. Belcher et al., Federal Tax Rules Should Not Be Used to Limit Trust Duration, 136 Tax Notes 833, 833 (2012) (arguing that trust duration is a state, not federal, law issue).
  201. See Cenziper supra note 177(quoting Tom Malinowski, the key sponsor of the Enablers Act).
  202. Thomas Piketty, Capital in the Twenty First Century 1; Kades, supra note 58.