PIERRE, S.D. (KELO) — For more than three decades, South Dakota has seen a small but increasingly steady flow of applications from financial trusts whose leaders decided their legal charters should be in the Mount Rushmore State. In some of the earliest years, there weren’t any new applications. State records indicate there were just three operating in South Dakota as of 1996.
But what seemed like only a slow trickle has gradually put South Dakota on the map as a favorable place for trusts to locate. Now there are more than 100.
Together, their assets totaled more than $600 billion at the end of 2021, according to the state Division of Banking. For perspective, that was about 100 times more than the entire $6 billion budget of South Dakota state government for 2023. Data on the total value at the end of 2022 is being gathered.
Some of the trusts are from South Dakota, some from other parts of the United States and some from overseas. There could be multiple reasons why they chose South Dakota. There no longer is a state income tax, or a state inheritance tax, or any rule against perpetuities. All of those make South Dakota an attractive spot for people to pass their wealth to the next generation. And, financial trusts operate in near-total privacy here. South Dakota law gives them that protection.
Nearly everything that can be factually known about a financial trust, such as amounts of assets, how assets are invested and how earnings are distributed, is considered private information under South Dakota laws. It’s true that state Division of Banking regulators can look at a trust’s records, but it’s also true those regulators can’t legally tell the public about what they found.
In that respect, South Dakota’s state government gives financial trusts the same privacy protection as many other financial institutions and businesses. Their sales and tax records aren’t public knowledge, either. But there are some things about financial trusts that state laws don’t keep from the public.
For example, a financial trust seeking to be licensed in South Dakota must apply to the state Division of Banking for approval. South Dakota’s state-chartered trusts are publicly listed on the division’s website. A state-chartered trust also must register with the South Dakota Secretary of State. Those registration records are public and can be found here.
Together those records can be a starting place if you’re trying to learn a little about when and where and how a specific trust began along with a little about who brought it to life. The Pandora Papers that came out two Decembers ago provided a deeper glimpse into the secretive world of trusts. The documents also offered some information about where South Dakota fits nationally.
That led KELOLAND News to take a closer look at the records on file with the Secretary of State for each of the 114 trusts chartered in South Dakota in 2022. KELOLAND News also requested an interview with Bret Afdahl. He’s director for the state Division of Banking, which is part of the South Dakota Department of Labor and Regulation. The department’s deputy cabinet secretary, Dawn Dovre, however declined the request on his behalf. She didn’t give a reason.
Seeking to learn more, KELOLAND News paid for one of its news reporters to attend an October 6-7 conference in Sioux Falls sponsored by the South Dakota Trust Association. The reporter wasn’t allowed to take news video of the presentations, but there wasn’t a ban against recording audio or taking photographs.
One of the conference’s 10 presentations came from Sioux Falls attorney Terry Prendergast. His was titled, “Pandora Papers — The Rest of the Story.” He said trust information is supposed to remain private much as a person’s medical records are.
Afdahl participated with three others in a discussion titled, “Regulatory Oversight of Fiduciary Services for Hire: Up to Snuff or Not Enough?” One of the co-presenters, Elizabeth McMorrow, called the theft of the Pandora Papers “a major crime.” She said the federal government and South Dakota’s state government don’t have “a veil of secrecy” because trusts must provide to the government substantial information about who operates them and how they are run.
Afdahl also provided conference attendees with an update on the division’s activities. He told the audience that the division’s examiners look at a sample of accounts but that trusts’ management teams need to step up, too. “People are important on both sides of the desk,” he said. “If something doesn’t look right, you need to raise your hand and ask the question.”
One of the reasons for examinations, according to Afdahl, is to ensure that funds don’t get into a trust’s investments through people trying to obscure how those funds came to be. “It’s very similar to cyber-security in that way. We have that really hard job; we have to be right every single time and the bad guy only has to be right once. They just have to get it through once,” he said.
How the trust industry started in South Dakota
South Dakota state government began positioning itself as a friendly location for financial trusts in 1997, when then-Governor Bill Janklow responded to suggestions from attorneys working in the trust field. Janklow issued a series of executive orders that established a state task force. He declared there could be as many members as a governor wanted and made the task force’s duration open-ended.
One reason South Dakota already was an attractive place for a financial trust was the lack of a state income tax. Another reason was South Dakota legislators had passed a law in 1983 that said, “The common-law rule against perpetuities is not in force in this state.” While intended to help Homestake Mining Company that declaration also meant trusts could extend generation upon generation.
David Knudson, a Sioux Falls lawyer, prepared one of South Dakota’s first trusts during the late 1980s. Knudson was chosen as the trust task force’s first chairman and he led the group throughout the remaining five years of Janklow’s time as governor. Knudson was co-chair of the task force with then-Lieutenant Governor Dennis Daugaard during the subsequent eight years of then-Governor Mike Rounds’ administration.
Knudson, whose last name now graces the University of South Dakota school of law, said in an interview last year with KELOLAND News for this story that he “was not a nuanced trust technician” but he understood the danger of taking South Dakota too far onto the edge.
The task force in those early times had about 15 members, depending on the year, with roughly half who were lawyers for trusts and estates, and half who were trust department officers, according to Knudson. He said the group typically met three times per year: the first to discuss possible changes, the second to work through proposals, and the third to assemble an omnibus measure for the Legislature to consider.
The legislative proposals through the years “attracted very few negative votes. They were broadly acceptable to people,” Knudson said. He noted that South Dakota’s relatively low capital requirement of $200,000 and lower administrative costs helped South Dakota compete against states such as Delaware. “It’s not that we are unique in anything, other than perhaps we check all the boxes,” Knudson said.
Daugaard won the governor’s office in 2010. One of the candidates he beat for the Republican nomination was Knudson. Daugaard adjusted the task force membership by adding three-year terms in 2011, extended its duration in 2014, and somewhat reorganized it by further executive order in 2017. But the original purpose remained in place — to keep South Dakota competitive.
Daugaard, a lawyer, came from a banking and non-profit background before his election as the state’s chief executive. “During my time as governor, I never involved myself in the day-to-day regulatory work of the Division of Banking, but I did advocate for a couple of key changes to trust law,” Daugaard told KELOLAND News for this story.
“One change was to strengthen the requirements for South Dakota-based trust companies to have a physical presence in the state. The other was to increase the fees that trust companies pay so that the fees would fully cover the cost of regulating the industry,” Daugaard said.
He continued, “During my second term, I reduced the size of the task force, which had grown over time. By this point the trust industry in the state had matured, and so I also encouraged the trust industry to create a non-government professional association to advocate for its own legislation, much as other professions do.”
That led to the creation of the South Dakota Trust Association. Its annual fall forum drew several hundred participants to Sioux Falls last October. The organization has a lobbyist and about 60 member businesses.
There were 11 members of the task force in 2022. Its direct connection to the governor’s office makes South Dakota “unique,” according to Thomas Simmons. a law professor who teaches about trusts at the University of South Dakota. Simmons, who also serves on the task force, said other states generally develop trusts legislation through their attorneys’ professional organizations.
How does South Dakota benefit from that $607 billion? Jobs, mainly. State law requires that a trust have a South Dakota resident as a trust officer or key employee. A trust also must have office space in South Dakota, and a majority of its board must meet at least twice annually in South Dakota. Most of the trusts licensed in South Dakota have offices and attorneys in Sioux Falls. Some are in other places such as Rapid City and Pierre.
Unofficial estimates are that more than 500 South Dakotans work for trusts chartered in South Dakota. South Dakota’s economy gains from the money earned by those South Dakota lawyers, accountants and administrative staff who service trusts, as well as from property taxes and sales taxes paid by those people and their businesses, according to Simmons.
A writer for Kiplinger’s recently rated South Dakota as one of seven states with favorable trust environments. Others are Alaska, Delaware, Nevada, New Hampshire, Tennessee and Wyoming Said Daugaard, “The trust industry brings us well-paying white-collar jobs and pays bank franchise tax to school districts and the state.”
Trust companies allowed by law
South Dakota law provides for two types of trust companies. Public trust companies accept public accounts. Private trust companies “limit activities to the management of private assets, usually for the benefit of a single family lineage,” according to the division’s website. A private trust is defined in state rule this way: “A private trust company is one that does not engage in trust company business with the general public or otherwise hold itself out as a trustee or fiduciary for hire by advertising, solicitation, or other means and instead operates for the benefit of a family or families, regardless of whether compensation is received or anticipated.”
South Dakota law also requires that financial trusts pay for state regulators to keep an eye on them. As the number of state-registered trusts grew in South Dakota, so did the numbers of trust examinations and the staff employed by the state Division of Banking. Five trusts went through examinations in 2001, when the division’s entire staff numbered 14.6 FTEs. By 2011, the division had two examiners devoted to trusts. And by 2022, the division’s staff had more than doubled to 35.5, with the trust side alone at 16.
State examiners inspect the records of public trust companies at least once every 24 months and assign a rating of 1 to 5, with 1 as the best. A rating of 3 means informal or formal enforcement action may be taken. A 4 means custodial accounts are at risk. A 5 signals the trust could have to be shut down. Examiners also look at the records of private trust companies at least once every 36 months and assign a rating: Strong, satisfactory, needs improvement, or unsatisfactory.
Dovre, the deputy cabinet secretary, told KELOLAND News that more-detailed definitions used for examination ratings can be found in the information packet provided to trust applicants. She said it’s been more than a decade since the Division of Banking last issued a cease and desist order against a trust company.
“As with our banks, we have a small number of trust companies rated ‘needs improvement’ or ‘less than satisfactory’ at any given time,” Dovre said in an email. “When these situations arise, we work with the board of such company to adopt a resolution to address the identified weaknesses. If a board resolution is not sufficient to resolve the issues timely, we will enter into a memorandum of understanding (MOU) which will identify steps to be taken with timelines for progress. If the issues are not addressed through the use of an MOU, we can issue a Cease & Desist Order (C&D) ordering the company to take additional action with very specific deadlines.”
The amounts that South Dakota-registered trusts protect are large. Trusts report their assets to the state Division of Banking as of December 31 each year. Assets totaled more than $104 billion in assets at the end of 2011. By the end of 2021, assets had exceeded $607 billion. Nearly half of that growth came since 2018.
Since leaving the governor’s office in January 2019, Daugaard said he now, for the most part, is retired and serves on several part-time business or non-profit boards. One is as a manager for Standard Trust, one of seven trust applicants that became chartered in South Dakota in 2019.
Familiar names involved in trusts
Standard Trust is interesting because of the profiles of its managers.
The initial ones included Jeffory (“Jeff”) A. Erickson of Sioux Falls, a vice chairman for American Bank & Trust. He chairs both the state Banking Commission, whose responsibilities include oversight of financial trusts, and the state Board of Economic Development that distributes low-interest loans and grants to businesses and communities.
Others were a retired South Dakota Supreme Court justice, Loral (“Lori”) Wilbur, now of Sioux Falls; a prominent Watertown businessman, Douglas Sharp, who’s served on several high-profile state commissions; and Preston B. Steele, chairman for American Bank & Trust, which recently moved its main offices to Sioux Falls from Huron.
Standard Trust’s initial organizers were Scott A. Erickson of Sioux Falls, who’s been a director since 2019 and recently was named a vice chairman for American Bank & Trust; Carey A. Miller, a lawyer at Woods Fuller Shultz & Smith in Sioux Falls; and Matthew Bock, a Sioux Falls attorney.. who also has been the Banking Commission’s legal adviser.
Daugaard joined Standard Trust as a manager in 2020. The two Ericksons are no longer listed as managers. Wilbur’s daughter Paige Bock took over as the trust’s registered agent. Among its staff is Daugaard’s son-in-law, attorney Tony Venhuizen of Sioux Falls.
Daugaard explained his own role with Standard Trust. “As a director, I approve the annual budget, approve policies and procedures that ensure the company is run properly, review quarterly financial statements, and review the annual audit of the company, to confirm the company is being run in accordance with state law, and I am paid a nominal amount for that service,” Daugaard said.
Nestled in the information about the 100-plus other trusts are other South Dakotans whose names might be familiar to at least some people. Among them are Barb Everist, a former state senator from Sioux Falls (Blue Lake Trust); Pierre attorneys Robert Anderson and Charles Schroyer (Acorn Trust); Ralph Brown, a retired University of South Dakota economist (Bankers Trust); and Jim Abbott, a retired USD president and former legislator (Sawmill Trust).
How South Dakota Trust Company started
One of the most visible servicers of trusts is the South Dakota Trust Company. Today, more than 40 South Dakota-chartered trusts are managed in some fashion by South Dakota Trust Company and its attorneys. Based in Sioux Falls, it organized in 2001 as Third Constellation Trust Company LLC. Al King III of New York, New York, and Pierce McDowell III of Sioux Falls were initial managers. The company amended its articles of incorporation in 2002, added more managers, and changed its name to South Dakota Trust Company.
King was national director of estate planning from 1992 to 2001 for Citibank, which had moved its charter from New York to South Dakota in the early 1980s. King and McDowell connected after King reportedly saw an article that McDowell had written while McDowell was trust officer for a South Dakota-chartered bank. McDowell wrote the piece at the suggestion of Roy Adams, a trust lawyer in Chicago and New York who was chair of the editorial board for Trusts & Estates magazine.
Trusts & Estates published McDowell’s article, titled The Dynasty Trust: Protective Armor For Generations To Come, in its October 1993 issue. New York lawyer Ralph Engel suggested that King should read it. King in turn brought the article to the attention of Citibank management. Citibank then hired McDowell, and Citicorp Trust South Dakota opened in 1995 with McDowell as president and King vice president.
In the April 1996 issue of Trusts & Estates, King, McDowell and Daniel Worthington published Dynasty Trusts: What The Future Holds For Today’s Techniques. In 2001, King and McDowell left to form what eventually became South Dakota Trust Company. King ran SDTC’s New York office, while McDowell operated from South Dakota. South Dakota Trust Company continues to advertise in Trusts & Estates magazine on a regular basis.
In 2018, SDTC began operating a political action committee that makes campaign donations to South Dakota candidates for statewide and legislative offices. The purpose, according to its organizational statement: “Support candidates who are willing to protect, preserve, and grow the South Dakota trust industry.” McDowell listed himself as chairman and King as co-chair, with another SDTC attorney, Matt Tobin, as treasurer.
In its first year, the SDTC-affiliated PAC received $10,000 from Jack Binion of Las Vegas, Nevada, as well as $10,000 apiece from each of South Dakota Trust Company; affiliate SDTC Services; and two trust funds that are SDTC customers. The PAC also received $5,000 from a third trust customer and $5,000 from Henry Crown & Company of Chicago, Illinois.
The first contributions went to the two candidates running for South Dakota governor in 2018. Republican Kristi Noem received $18,000, while Democrat Billie Sutton got $10,000. Late in the campaign, when the race looked too close to call, Noem and Sutton each received another $5,000. Noem eventually won the election with 51% of the vote. A candidate for the Legislature, Senator Jeff Partridge, a Republican who worked as a financial consultant in Rapid City, also received $1,500.
In 2019, the PAC gave $500 to South Dakota’s then-Attorney General Jason Ravsnborg. In fall 2020, South Dakota Trust Company donated $5,000 to the PAC, and the PAC in turn made contributions of $2,000 to each of Governor Noem and two South Dakota Senate candidates, incumbent Lee Schoenbeck, R-Watertown, and Michael Rohl, R-Aberdeen. Another $2,750 of contributions were spread among four other legislative candidates.
Rohl was challenging an incumbent, Senator Susan Wismer, D-Britton. She had been the Democratic nominee against Governor Daugaard in 2014. She returned to the House in 2017. In 2018, Wismer spoke critically against South Dakota’s trust industry during a legislative committee hearing. She won a Senate seat in 2018. But the trust PAC’s managers noted Rohl’s 2020 challenge to Wismer and sent $2,000 to him. Rohl beat Wismer, 55-45%.
In 2021, South Dakota Trust Company gave another $5,000 to the PAC, and the PAC in turn donated $15,000 to Governor Noem. In 2022, South Dakota Trust Company gave $6,300 to the PAC. The PAC then contributed $2,500 to Noem and $1,500 to her Democrat challenger, Representative Jamie Smith of Sioux Falls. The PAC also spread $4,700 total among 15 legislative candidates; one was Rohl, now an incumbent, who received $750. Wismer had challenged him to a rematch. Rohl won again, this time by 59-41%.
Regulating the trust industry in South Dakota
Since 1997, the trust task force brought at least one set of proposals to nearly every legislative session. One of those exceptions was 2022. The task force’s current chairman, Carl Schmidtman of Sioux Falls, said however that the absence wasn’t because of the Pandora Papers.
The Pandora Papers did prompt a U.S. House of Representatives committee to focus some of its attention on South Dakota’s trust environment. SDTA’s board of directors and director Afdahl responded in separate letters. Afdahl provided direct answers, while SDTA’s letter went farther, saying that the attention was misplaced.
Wrote the SDTA board, “The suggestion that South Dakota law and/or South Dakota trust companies promote illicit activities is nonsense, ignores the truth, and is offensive. All South Dakota state-chartered trust companies must comply with the requirements of federal law, South Dakota law, and regulatory guidance from the South Dakota Division of Banking.”
The SDTA letter added, “The Pandora Papers authors acknowledged, in numerous reports, that despite having millions of pages of stolen information and their review of approximately 80 trusts linked to South Dakota, they did not find any evidence of wrongdoing or illegal activity. This is a positive testament to the state’s trust industry as well as the South Dakota Division of Banking.”
Afdahl told the SDTA audience in October that the Pandora Papers had led him to review the records, searching for what the division’s examiners might have missed.
He found nothing.
“There was no ‘there’ there at the end of the day. We looked at every account that was cited, and the due diligence was done,” Afdahl said. “Whether someone liked that someone brought their money to the United States or not, we can debate that. But the point is to follow the law that’s been outlined here today, and we all have to do our part to make sure we protect your individual institution, but also the reputation of the state.”
This week, the nearly-annual legislation from the trust industry began its way through the lawmaker process at the South Dakota Capitol. A Senate committee heard about the more than 500 white-collar jobs and the $5 million trusts paid in South Dakota bank franchise tax last year.
The prime sponsor of SB-95, Republican Sen. Lee Schoenbeck, introduced the bill to the committee and handed off to Terra Larson, a Pierre lawyer who lobbies for the South Dakota Trust Association. Larson in turn handed off to Jennifer Bunkers, a Sioux Falls lawyer and a member of the governor’s task force on trusts.
Bunkers portrayed the bill as routine, saying it dealt with such things as electronic execution of documents and updates some statutory references. “This is our mostly annual bill,” she said. She said the committee didn’t need her to go through its 17 pages. “We don’t see these as controversial changes at all.”
The fourth person to testify was state banking director Afdahl. “We are the friendly regulator of all those trust companies,” he said, and then suggested to the committee to vote for the bill.
No one testified against it. None of the nine senators asked a question about it. Schoenbeck made a final set of comments before the 8-1 vote to send it to the full Senate, where it later passed 33-2.
“The annual bill is an important part of that process so we can stay on the cutting edge,” he said. “It is a regulated industry.”