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How a S. Dakota storefront helps the 1 percent become richer

It's true that the rich aren't like the rest of us. While they might not yet be able to escape death, some of them are finding routes to avoid taxes.

As detailed by Bloomberg News, wealthy families have socked away $121 billion in so-called "dynasty trusts" in South Dakota, through a mechanism that's almost unknown to the average American.

Some of the beneficiaries include part of the Pritzker family; the family behind the Radisson hotel chain; a trust linked to the late hedge-fund pioneer Jack Nash; and heirs to a Peruvian sugar plantation, among others, according to the report.

These families and heirs don't need to move to South Dakota to take advantage of the loophole. All they need to do is rent an address in the state, with many of them renting space in a quiet former five-and-dime in Sioux Falls. The loophole works by creating a never-ending trust that pays heirs the money they need to spend, while keeping the remainder intact and free of the estate tax, which is currently 40 percent.

The loophole was made possible after South Dakota in 1983 repealed a rule that limits a trust's duration to an heir's lifetime, plus 21 years. The state also appeals to the rich because of secrecy laws and the protection of trust assets from divorced spouses and creditors, Bloomberg notes.

With uncertainty last year over whether Congress would continue an exemption that allowed the estate tax threshold to rise to $5 million, the rich rushed to create billions of dollars of new trusts in 2012.

South Dakota and a few other states are "creating laws that are conducive to a massive exploitation of a federal tax loophole," Edward McCaffery, a professor at the University of Southern California's Gould School of Law, told Bloomberg. "We have a tax haven in our midst."

For rank-and-file middle-class Americans, such devices go a long way to illustrating how the wealthy are able to keep getting richer. With the help of tax attorneys and investment specialists, the rich are hitting upon creative ways to shield their wealth from the tax man. 

At the same time, many Americans continue to feel poor, despite the economic recovery. The median American household income is still below pre-recession levels, according to a study earlier this year from two former Census Bureau officials. 

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