The South Dakota Community Property Special Spousal Trust

The South Dakota Community Property Special Spousal Trust is a very compelling and progressive tax planning tool. The trust may be revocable or irrevocable, created by one or both spouses with both spouses as beneficiaries. This is a very powerful state income and estate tax planning tool because it allows married settlors of the trust to avoid state taxation on undistributed retained income within the trust (because South Dakota does not have an income tax) and treats the property as community property at the death of the first spouse, applying a 100% step-up in basis at date of death, therefore, avoiding federal capital gains taxation of marital/trust assets when sold.

To date, there has not been a single challenge from any tax authority relative to the use and tax benefits of Community Property Trusts. 

Click here to review South Dakota’s statute, and click here for an article appearing in the South Dakota Law Review written by Terry Prendergast, leading South Dakota attorney who was instrumental in the drafting and passage of the statute.

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, with the potential to avoid federal estate tax and state income tax on undistributed income forever.
  • May also be created, in appropriate cases, to take advantage of South Dakota’s leading Directed Trust laws and Domestic Asset Protection Trust laws for enhanced protection from creditors.
  • Leverages South Dakota’s privacy laws, considered by most commentators and Trusts & Estates Magazine as the best in the nation.

For more information on the South Dakota Community Property Trust and other powerful modern trust law concepts, please contact Bridgeford Trust via our contact page.