How South Dakota Became a Tax Shelter for Wall Street: Explainer
And why wealthy investors are parking billions here
Adobe Stock image.
By Todd Epp, Northern Plains News
South Dakota has quietly become one of the most important tax-avoidance hubs in the United States—not by attracting factories or headquarters, but by building one of the most permissive trust law regimes in the country.
Wealthy investors, especially private-equity executives, are using nongrantor trusts based in the state to legally shield income owed to other states from state income taxes.
At the center of this growth are South Dakota nongrantor trusts: legal entities created under state law that can receive and hold income—often millions or tens of millions in carried interest—without the beneficiary paying income tax to their home state unless they take money out.
According to state figures, assets in South Dakota trust companies surpassed $800 billion by mid-2025, up roughly fivefold over the past decade.
Why South Dakota?
The state offers a rare combination of laws: no state income tax; perpetual trusts; strong asset protection; directed trust statutes; and high levels of confidentiality. These provisions have been expanded steadily since the 1980s through legislative action and a standing Governor’s Trust Task Force.
Private-equity managers often transfer carried interest into these trusts early, when its value is low. When profits later materialize, the trust—not the individual—collects the income, avoiding state taxation.
South Dakota benefits from fees, licensing revenue, and employment in financial services. Other states lose potential tax revenue, and enforcement efforts remain limited.
The system is legal, but controversial. Critics argue it shifts tax burdens downward and disconnects wealth from civic responsibility. Supporters say it simply follows the law as written.
Why this matters: South Dakota deliberately engineered this system. Whether it remains politically and federally sustainable is an open question.
Why this matters — and why we cover it
Stories like this don’t come from press releases or quick rewrites. They require time, document work, and independent reporting to explain how power and money actually move. Free readers get the reporting. Paid subscribers make the reporting possible. If you value clear, accountable journalism about how South Dakota works—and who benefits—consider becoming a paid subscriber.
Sources and reporting
- The Wall Street Journal, Miriam Gottfried, Dec. 26, 2025
- South Dakota Codified Laws, Title 55 (Trusts and Fiduciaries)
- South Dakota Public Broadcasting reporting on trust assets (2025)
- South Dakota Trust Association legislative updates
- New York Department of Taxation & Finance trust guidance
- California Franchise Tax Board trust rulings
- Axios reporting on South Dakota as a U.S. trust haven
- Academic research by Max Schanzenbach (Northwestern) and Robert Sitkoff (Harvard)
The income taxation of trusts is genuinely one of the most complex areas in all of tax law — and one of the most misunderstood. A trust can be subject to income tax in multiple states simultaneously depending on its connections — where it was created, where the trustee is located, where the grantor lives, where the beneficiaries are. Choosing South Dakota isn’t avoidance — it’s simply playing within the rules that various states have set forth, the same way any taxpayer considers tax consequences when making decisions. And it’s worth noting that some South Dakota trusts are still subject to tax in other states regardless. The planning opportunity is real but it requires real analysis, not just a state selection.
Developed under Janklow Administration, so I've heard.