Qualified Domestic Trust (QDOT) | Estate Planning When You’re Married
A Qualified Domestic Trust is a unique type of trust that allows a person who survives a deceased spouse to benefit from the marital estate tax deductions, even if the widow/widower isn’t a United States citizen.
Usually, if the surviving spouse is a U.S. citizen, Sec. 2056 (a) of the marital law deduction provides that they automatically benefit from the marital deduction. However, if the spouse is not a citizen, they don’t qualify for the tax deductions on the estate their partner leaves behind.
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What is a Qualified Domestic Trust (QDOT)
QDOT to the Rescue
If your marriage involves a non-US spouse, it would be wise to work with a trust attorney sooner than later to set up a Qualified Domestic Trust. The QDOT will guarantee that your loved one is not burdened by taxes on the inheritance you leave them when you die.
The unlimited marital deduction provision saves U.S. spouses thousands and even millions of dollars. It’s a federal gift and estate tax law that helps you (an American) transfer an unlimited amount of wealth to your spouse (a fellow American) at any time, including when you die, without pang taxes.
This unlimited marital deduction is said to be an estate preservation tool. It allows for assets to be distributed to a surviving spouse and grow without estate and gift tax liabilities. The taxes only apply when the surviving spouse dies.
Unfortunately, this wealth-friendly provision applies only if the surviving spouse is an American. Like everything, though, the law offers alternatives, and one of them is the qualified domestic trust. An experienced lawyer can help set it up to preserve the tax deduction privileges on your estate if you die before your spouse attains American citizenship.
What is QDOT TRUST?
A Qualified Domestic Trust (QDOT) is the equalizer, allowing non-American spouses to have the same rights to tax deductions on estate taxes as American spouses upon the demise of an American husband or wife. A QODT or QDT saves the non-American widow or widower from paying hefty taxes on their inheritance.
Apart from the inability to leverage tax deductions, a non-citizen spouse cannot use the deceased spouse’s unused exemption amount (DSUE amount), also known as portability, without this type of living trust.
With help from experienced estate planning attorneys, married couples can plan their estate and set up a QDT so that upon the American spouse’s demise, the non-citizen spouse gets estate tax deductions and exemptions.
How the QDOT Works
Assets passed to qualified domestic trusts (QDOTs) by irrevocable assignment before the decedent’s estate tax return gets filed to qualify for the marital deduction.
If you (a U.S. citizen) place your assets and property into a QDOT trust, when you slip away, estate taxes will get deferred until your non-citizen spouse passes away.
Assets in a Qualified Domestic Trust are not exempt from estate taxes. Instead, trust is simply a vehicle to defer the taxes. When the surviving spouse dies, assets in the QDOT will be subject to federal estate taxes.
The law mandates that at least one trustee of the Qualified Domestic Trust should be an American citizen. It should alternatively be an American corporation that is tasked with retaining estate tax.
The trust should have a contract that qualifies it as a power of appointment trust, an estate trust, or a qualified terminable interest property trust (QTIP trust).
Unless they are distributions of income, no other distributions may be made from the trust unless the trustee has the right to withhold estate tax. For assets passing to a QDOT for a non-American widow/ widower, the DSUE amount is calculated based on adjustments after the final distribution or termination of the trust.
If the estate going into the trust is valued to be more than $2M, one of the trustees should be an American bank and should post an IRS bond, which is 65% of the assets’ fair market value.
If the estate going into the QDOT is less than $2M, not more than 35% of the trust’s asset valued yearly can be foreign real property. Otherwise, the 65% IRS bond applies.
If your marriage involves a non-American spouse, a QDOT trust helps ensure that if they are the surviving spouse, they get the most from the estate you leave when you die.
A QDOT defers estate taxes and qualifies the spouse you leave behind for deductions and exemptions. An experienced trust lawyer can help set up a QDOT that is fully compliant with the set rules for the trust’s efficiency as an estate planning tool.
- Charitable Remainder Trust (CRT)
- Grantor Retained Annuity Trust (GRAT)
- Qualified Personal Residence Trust (QTIP)
- Learn more on estate planning.
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