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. 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.
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.
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 the vital importance of state fiscal soundness when comparing top tier jurisdictions, South Dakota is clearly the preferred choice for this type of trust planning because of its widely known financial strength, no state income tax, and clear commitment to being the most progressive trust jurisdiction in the nation.
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.
To learn more about how Bridgeford Trust Company may be able to assist with this and other progressive planning opportunities under South Dakota trust law, call (605) 224-9189 or contact us online.
