Community Property Trusts

The South Dakota Community Property Special Spousal Trust may be a revocable or irrevocable trust created by one or both spouses with both spouses as beneficiaries to avoid taxation, because it treats the property as community property at the death of the first spouse, applying a 100% step-up in basis at date of death of the first spouse.

The South Dakota Community Property Special Spousal Trust:

  • Avoids federal capital gains taxation of marital/trust assets when subsequently sold. (In non-community property states, the step-up in basis at date of death is only 50%, which means that taxes would be owed on the remaining 50% of the cost basis of the marital property when sold.)
  • Creates a powerful tax move that has the potential to result in compelling federal and state tax savings over subsequent generations by combining its benefits with the federal estate tax benefits of a Dynasty Trust, in a jurisdiction that does not have an income tax, such as South Dakota.
  • May also be created, in appropriate cases, to take advantage of South Dakota’s Directed Trust laws, delivering more control to settlors and Domestic Asset Protection Trust laws for enhanced protection from creditors.

The only other state with a similar Community Property Special Spousal Trust statute, applying to non-residents, without a state income tax, is Alaska. However, given that state’s extremely unstable financial situation and recent statements and submitted budget proposal by Alaska’s Governor Bill Walker regarding the creation of a state income tax in the very near term, it appears that South Dakota is the preferred choice for this type of trust planning, primarily for the foreseeable future, because of its widely known financial strength, no state income tax, and clear commitment to being the most progressive trust jurisdiction in the nation.

To read our full review of this legislation, you can click here for the complete article.

Feel free to contact us to learn more about how Bridgeford Trust may be able to assist with this and other progressive planning opportunities under South Dakota trust law.