Community Property Trusts

A powerful tax planning strategy for married couples.

A South Dakota Community Property Special Spousal Trust (commonly referred to as a Community Property Trust) is a sophisticated state income and estate tax planning tool that allows married settlors to combine the benefits of South Dakota’s modern trust laws with community property planning. Properly structured, a Community Property Trust can significantly reduce future capital gains taxes while also creating opportunities for long-term estate planning, income tax planning, asset protection, privacy, and multi-generational wealth preservation.

The trust may be established as either a revocable or irrevocable trust by one or both spouses, with both spouses serving as beneficiaries. Because South Dakota does not impose a state income tax, undistributed retained income within the trust generally is not subject to state income taxation. The trust also treats eligible trust assets as community property at the death of the first spouse, applying a 100% step-up in basis at death and thereby avoiding federal capital gains taxation when those assets are later sold.

Key Advantages

Benefits of a South Dakota Community Property Trust

Community Property Trusts provide married couples with more than just tax advantages. When established under South Dakota law, these trusts can also leverage the state’s modern trust laws, including Dynasty Trust statutes, Directed Trust laws, asset protection strategies, and industry-leading privacy protections.

100% Step-Up in Basis

Avoids federal capital gains taxation of marital 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.

Multi-Generational Tax Planning

Creates 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.

Enhanced Planning Flexibility

May also be created, in appropriate cases, to take advantage of South Dakota’s Directed Trust statutes and Domestic Asset Protection Trust laws for enhanced protection from creditors.

Industry-Leading Privacy

Leverages South Dakota’s privacy laws, considered by most commentators and Trusts & Estates Magazine as the best in the nation.

Jurisdiction Selection

Why South Dakota?

South Dakota is among a small group of no-income-tax states that permit non-residents to establish a Community Property Trust. However, fiscal soundness is an important consideration when comparing top-tier U.S. trust jurisdictions. South Dakota’s long-standing financial strength, nationally recognized trust statutes, and continued commitment to modern trust law have made it the preferred jurisdiction for this type of advanced planning.

For a deeper examination of the South Dakota Community Property Special Spousal Trust and its origins, read Terry Prendergast’s article, originally published in the South Dakota Law Review.

SOUTH DAKOTA SPECIAL SPOUSAL PROPERTY TRUSTS: SOUTH DAKOTA “STEPS-UP” TO THE PLATE AND HITS A HOME RUN FOR SURVIVING SPOUSES →

Questions About Community Property Trusts?

If you would like to learn more about Community Property Trusts or explore other planning opportunities available under South Dakota trust law, reach out to us through our contact form or call us at (605) 224-9189.