The release of the Panama Papers has created a number of recent articles critical of South
Dakota's asset protection statues and lack of an income tax. The Panama Papers are over
11 million leaked documents containing sensitive information for 214,000 offshore companies
set up by Mossack Fonseca, a Panama law firm. The leaked documents bring to light how some
wealthy individuals hide assets from public scrutiny.
The immediate assumption by many journalists and members of the public is that anyone wanting
to hide something from public scrutiny must inherently be engaging in illegal activity.
Such an assumption is wrong on several fronts.
First, it is perfectly legal in every U. S. state for business entities to be owned by
nonresidents. A corporation registered in South Dakota or a trust with its situs in
South Dakota is legitimate even if it is owned or controlled by someone living in another
state or country.
Second, it's legal for residents of any U. S. state to own corporations or trusts located
in other states. The same is true for most other countries, although many countries put
limits on the amount of assets located within their borders that may be owned by foreign
corporations.
Third, just because there are no personal or corporate state income taxes in South Dakota
does not mean nonresidents who own businesses or assets in the state do so illegally or
avoid taxes as a result. While they may not owe income taxes in South Dakota, they probably
do still owe state income taxes in the state in which they live. And, of course, all US
citizens and corporations must still pay federal income taxes.
One reader commented that we need a state income tax to discourage people from bringing
their income and assets into the state, contending that South Dakota "communities, schools, and
healthcare suffer [and] it depresses the lower/middle income people." Unless I am missing something,
it doesn't seem to me that moving money and income into South Dakota hurts our infrastructure
or costs our residents money in any way. Conversely, it does create a few high paying jobs and
professional opportunities that otherwise would not exist.
Fourth, there are compelling and legitimate reasons why law-abiding citizens may want
to hold assets in corporations, limited liability companies, and asset protection trusts. Longtime
readers have seen me preach for 25 years that investors should never own real estate or
businesses in their personal names. Why? Any wealth is a target for those unscrupulous
people who make a living preying on the hard-earned assets of others. While liability insurance
and umbrella policies are the first line of defense, the proper use of these other entities
is additional protection in case your insurance fails because your insurance carrier denies
the claim, you miss a payment, are sued for more than your insurance limit, or the insurance
company goes bankrupt. I have personally seen every one of these events happen to clients.
Finally, reporters did find that some of the Panama Paper corporations were shell corporations
seemingly used for illegal purposes. But is that a reason to ban corporations or trusts
from a jurisdiction? Using legal entities for illegal purposes is something that no
government can fully regulate, control, or stop, any more than it can eliminate other
forms of criminal behavior.
Corporations, trusts, and other entities are business and financial planning tools which
can be used legally or illegally. Ultimately, whether they are used appropriately and legitimately
or whether they are misused depends on one simple but essential factor: the integrity
of the individuals who own them.