Effective July 1, 2016, a new South Dakota law will allow residents of common law, or separate property states, to take advantage of the benefits available to couples in community property states.
Specifically, the new law will allow married individuals to create revocable or irrevocable trusts (including asset protection trusts), with either or both spouses as beneficiaries, known as Special Spousal Trusts. By transferring property into Special Spousal Trusts, the grantor or grantors elect to have the property classified as community property pursuant to Internal Revenue Code section 1014(b)(6). In separate property states, if property is held jointly by spouses, the surviving spouse will receive a basis "step up" in the deceased spouse's one-half interest, with no step up in the one-half interest held by the survivor.
By using a Special Spousal Trust, at the death of the first spouse, the surviving spouse receives a step-up in basis on all of the assets, rather than a step-up in basis on only one-half of the assets. Because of the full step-up in basis on property held in Special Spousal Trusts, taxable gains on the sale of any property sold after the death of the first spouse may be eliminated or substantially reduced. These trusts can be established by South Dakota residents or those that live in other separate property states.
Special Spousal Trusts are a valuable planning tool for many people. In particular, married small business owners where one spouse is not involved in the business, people with valuable art or collectibles collections, and people with significant illiquid assets compared to cash holdings, whose assets have appreciated notably, tend to be good candidates. This is particularly true if one spouse is likely to pass away sooner than the other, or if a sale of low-basis assets is expected to occur after the first spouse's death.
Utilizing South Dakota's new Special Spousal Trust laws, combined with South Dakota's existing unparalleled trust laws, allows grantors to use South Dakota trusts to attain significant tax advantages, maintain control of their assets, and keep their families' affairs private, in perpetuity.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
