An important estate tax deduction for U.S. citizens and resident aliens is the unlimited marital deduction. This deduction allows an individual to transfer an unrestricted amount of assets to his or her spouse at any time, including at the death of the transferor, free from gift or estate tax consequences. However, the unlimited marital deduction does not apply to transfers to a surviving spouse who is not a U.S. citizen. Instead, if the surviving spouse is not a U.S. citizen, the deduction is available for transfers to a “qualified domestic trust” for the spouse’s benefit (commonly referred to as a “QDOT”).
Why a Qualified Domestic Trust?
A qualified domestic trust, or QDOT, is designed to achieve a very particular goal: deferring federal estate tax when a U.S. citizen dies and leaves a large amount of money to a spouse who is not a U.S. citizen.
In general, to qualify as a QDOT, a trust must meet the following requirements:
- At least one trustee must be a U.S. citizen or domestic corporation.
- The trust must not allow a distribution of principal unless the U.S. citizen trustee has the right to withhold estate tax on the distribution.
- The trustee must keep a sufficient amount of the trust assets inside the U.S. to ensure the payment of federal estate taxes.
- The executor of the citizen’s spouse estate must elect to have the marital deduction apply to the trust.
With a QDOT, at the first spouse’s death, assets go to the trust instead of to the surviving noncitizen spouse. The survivor receives benefits (such as interest generated by trust bank accounts) from the trust assets, but does not own them. Under some arrangements, the surviving spouse can also receive principal payments. When the second spouse dies, assets pass to other beneficiaries named in the trust document. If the estate is valuable enough, estate tax is then paid as if the assets were in the estate of the first spouse to die. Trust assets are not included in the estate of the second spouse to die.
If you have any questions regarding QDOT’s or your tax options when your spouse is not a U.S. Citizen, we are here to help. We can be reached at (786) 837-6787 or via email – firstname.lastname@example.org.