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In or around 1995, a trust containing assets from the wealth of J. Paul Getty, the oil tycoon who was once the richest man in the world, was quietly transferred from California to neighboring Nevada. The Gordon P. Getty Trust—named for one of J. Paul Getty’s sons—was one of a number of “successor trusts” to the original Getty family trust, created in California in 1934. California was where the Gettys moved after striking it rich, and California was where their dynasty would grow for nearly a century, cultivating influence over state and local politics and enmeshing itself in Los Angeles philanthropy.
California’s tax laws, however, are some of the most progressive in the country; residents who make more than $1 million pay 13.3 percent of their incomes in state taxes. Nevada, meanwhile, has no individual income tax, no corporate income tax, and some of the loosest trust laws in the nation.
And so some Gettys may have wanted to pretend they were residents of Reno, Nevada, the “biggest little city in the world,” not Los Angeles, the second-biggest city in the U.S.
Having passed a slew of financial secrecy laws, Nevada has drawn the shades on personal and corporate financial dealings, keeping information from creditors, the public, and even the government. Nevada, unlike the majority of states, does not have an agreement to share data with the IRS (or so claim several Nevada law firms).
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There are typically only two ways one may pierce the veil and learn about these complex financial schemes. Investigative journalists may obtain leaks, à la the 2016 Panama Papers and the 2021 Pandora Papers. Another possibility? There’s a lawsuit.
A recent exposé by Evan Osnos in The New Yorker explains how one segment of the Getty family—sisters who inherited wealth from their father, Gordon Getty—used a system of Nevada trusts to avoid more than $300 million in California taxes over the last decade ($100 million from one trust alone). A Getty investment adviser recommended her clients pay their California tax obligations rather than maintain the fiction that the sisters were domiciled in Nevada, where their trusts were based. Other family wealth advisers objected, and the adviser, Marlena Sonn, was fired. Sonn then filed a wrongful termination lawsuit, exposing the shady details of the Nevada trusts.
We have been studying the complex ways that the world’s richest 0.01 percent—those with roughly $30 million or more—play a global shell game to keep their wealth out of the public eye. Together we have co-authored studies on dynastic wealth, family offices, and trusts. One of us authored the book The Wealth Hoarders: How Billionaires Pay Millions to Hide Trillions.
The Getty case is no anomaly; the world’s richest rely on states with loose financial laws like Nevada to avoid both taxes and accountability. What’s different about this story is that the public knows about it. Visible cracks in the system are rare, but they are needed to shut the system down.
AT THE GLOBAL LEVEL, the ultra-wealthy are hiding at least 10 percent of the world’s private wealth, though the real number may be as much as $32 trillion, according to estimates of offshore wealth. In the U.S., there is an estimated $5.6 trillion in trust and estate assets alone, but this number is probably much higher; there aren’t federal laws or rules requiring state disclosure of trust registration and assets. Some states allow unregulated trust companies, so even states themselves may not know how much money their trust companies are dealing with.
At the global level, the ultra-wealthy are hiding at least 10 percent of the world’s private wealth, though the real number may be as much as $32 trillion.
The wealth hiding system depends entirely on professional enablers, a wealth defense industry of tax attorneys, accountants, and advisers, all facilitating the vanishing act. These enablers have a vast toolbox they use to help their clients sequester, hide, or redefine wealth and assets. Strategies include anonymous shell companies, offshore bank accounts, trusts, foundations, and other ownership forms. Complexity is key, as these systems are often layered with different ownership entities and chains of transactions.
Previously, the weapon of choice was the now-anachronistic anonymous Swiss bank account. Since 2014, however, banks in Switzerland have reported details of U.S. nationals with accounts to the U.S., per the Foreign Account Tax Compliance Act. Today, other tax havens have come into their own; according to the Tax Justice Network’s 2022 Financial Secrecy Index, the United States is the number one offender.
As EU and OECD countries have required higher levels of banking and ownership disclosure, the U.S. has lagged behind, benefiting from other countries’ transparency while offering little of its own. A major takeaway of the 2021 Pandora Papers, the result of leaks from 14 different firms in 11 jurisdictions, is that the U.S. itself has become a major tax haven. While wealthy Americans are probably still moving funds offshore to places like Bermuda and the British Virgin Islands, more and more hide their wealth “onshore.” This is primarily done with trusts and shell companies formed in U.S. states that have allowed their legislatures to be captured by trust and estate industries.
As we found in our 2022 study, “Billionaire Enabler States: How U.S. States Captured by the Trust Industry Help the World’s Wealthy Hide Their Fortunes,” there are more than a dozen states actively engaged in a race to the bottom to attract the most global trust business, courting industry representatives and loosening trust laws. Let’s call these states “trust havens.” The worst perpetrators include South Dakota, Delaware, Wyoming, and, you guessed it, Nevada.
While the wealth management industry will claim they are simply helping their clients obey the law, our study found that the trust industry is actively involved in writing state law, morphing and manipulating trust forms to serve the narrow interests of their wealthy clients. In small-population states like South Dakota and Wyoming, which are more likely to have part-time, poorly paid state legislators, the trust industry has succeeded in claiming that changes in trust law will attract business and create jobs.
The typical trust form, which is a vestige of pre-common law, has three components: the grantor (or settlor) who creates the trust and places property into it, the trustee who oversees the trust and acts as decision-maker, and the beneficiary for whom the assets are held in trust. A common use of a trust would be a parent establishing a trust to provide funds for a special-needs child after the parent’s death.
But from a wealth-stashing point of view, the beauty of the trust is how it creates “ownership limbo,” obscuring who truly owns the trust’s assets. Imagine a tax collector standing over a trust and asking, “Whose wealth is this?”
“It’s not mine,” says the grantor. “I just transferred it to the trust, so it belongs to the trust.”
“It’s not mine,” says the beneficiary. “Maybe someday, but not right now.”
“Of course it’s not mine,” says the trustee. “I’m just here to mind it.”
It’s the start of an inequality fairy tale, but also the perfect description of how trust funds are almost in a state of purgatory, protected from the fires of hell (taxation).
But the wealth management industry has done much more to push trusts as the key to wealth “preservation.” It has lobbied to weaken or eliminate the “rule against perpetuities,” which determines the maximum life span of a trust, allowing so-called “dynasty trusts” to last centuries, if not forever. And there are dozens, maybe hundreds of trust permutations, created and promoted by trust and estate professionals. “Asset protection trusts” shield wealth from creditors, including those seeking child support or alimony; these trusts include the “self-settled trust” in which the beneficiary of the trust is the grantor himself (the grantor, as you might guess, is most often a man). Another popular form, “grantor-retained annuity trusts” (GRATs), dances around estate and gift taxes. A 2021 ProPublica report found that more than half of the 100 richest U.S. billionaires deploy GRATs to avoid such transfer taxation.
SOUTH DAKOTA GOT A LOT OF SCRUTINY upon the release of the Pandora Papers, including in the Prospect, after the revelations that wealthy foreigners were setting up billions of dollars of trusts in the state. South Dakota has long since repealed its rule against perpetuities, so the wealth of the trust can grow forever, virtually untaxed. The state has no income or estate tax. And it has a government-sanctioned trust task force, composed primarily of trust industry professionals, to ensure state trust law is among the most “competitive” and secretive in the country.
Nevada is not far behind South Dakota. It, too, has no income tax and no corporate income tax. Trusts may not be able to last forever, but they can last 375 years, which is so long in terms of wealth accumulation it might as well be forever. Domestic asset protection trusts are allowed in Nevada, where wealth transferred to the trust is protected from creditors—including ex-spouses seeking alimony or child support—two years after the transfer of assets. It’s possible that Nevada has even more trust assets than South Dakota’s $500 billion; we simply cannot know, because Nevada passed a law in 2009 exempting trust company documents from public-records laws, determining them to be confidential.
In the case of California and Nevada, you have two states sitting side by side that have made starkly different choices. This is not mere partisan politics either. Nevada’s first trust law reforms in 1999 passed nearly unanimously, and the 1999 bill permitting domestic asset protection trusts was introduced by a Democrat.
Nevada, however, has recently built up its finance sector, complementing its major industries of tourism and gambling. Before its status as a trust haven was secure, Nevada was perhaps best known as Delaware’s biggest competitor for incorporation. Around the same time Nevada lawmakers were making it easier to form trusts, they were also relaxing corporate liability and disclosure laws, attracting hundreds of thousands of businesses—well, not to the state, but to the phone line of a lawyer in the state. Nevada has no corporate income tax, but the $200 annual business license fee ($500 for corporations) did raise more than $200 million in the 2022 fiscal year.
Nevada’s business-subservient reputation not only encourages the legislature to pass trust legislation, but shell companies and other business entities go hand in hand with trusts. After all, the Getty sisters formed Nevada-based corporations to serve as corporate trustees of their trust.
It is important to point out that not all states have been captured by the trust industry. New York and California—which have a lot of wealthy residents—have fended off these manipulations of state law. But as we see in the Getty case, they still suffer from the behavior of states that have taken the low road. State trust law in one jurisdiction undermines the rule of law and tax revenue in another.
THE TRUST HAVEN STATES ARE UNLIKELY to voluntarily reform their ways, as even a couple hundred professional jobs are enough of an incentive to maintain the status quo—and because if one trust haven state shuts down, the wealthy will simply move to another.
Instead, the drive to shut down trust abuse must come from the neighboring states that suffer, like California. This will probably require changes to federal trust law. But that is exactly the conversation we should be having.
In our report on “Billionaire Enabler States,” we propose that federal lawmakers strengthen enforcement to discourage abuses and amend federal law to override state changes. This requires rebuilding the capacity of the Internal Revenue Service to track trust abuse and rigorously enforce existing law. Last year’s Inflation Reduction Act included substantial resources to rebuild the oversight capacity of the IRS. The House GOP, in its first act in the 2023 session, voted to roll back this investment, but that legislation will certainly not succeed in the Senate.
In addition, though states may loosen trust laws to attract illicit wealth, the federal government can pass laws to serve as a strong check to state-level solipsism. It should not be legal for trusts to serve as secret stashes of wealth, and thus they should be properly disclosed. The Corporate Transparency Act of 2020 requires disclosure of beneficial ownership of shell companies and corporations, yet trusts were excluded—this law could simply extend to trusts. Going further, Congress could establish a federal trust registry, recording the real identities of settlers, beneficiaries, and trustees.
Outside of accountability and disclosure, Congress could disincentivize the creation of wealth-hiding trusts by levying an annual excise tax on trust assets, targeting trusts with over $25 million. It could also outlaw trust forms that are intentionally designed to obfuscate ownership and responsibility, like domestic asset protection trusts, and limit trust life spans by establishing a federal rule against perpetuities to discourage the neo-feudalism of dynastic wealth accumulation.
In our current environment of profound inequality, it may sometimes feel as if the rules are different for the rich. Unfortunately, as states like Nevada morph their laws to enable the rich to deftly dodge taxes, this is literally true: Anything can be bought, including tax evasion.
Chuck Collins and Kalena Thomhave are co-authors of the report “Billionaire Enabler States.”
