When an international couple comes into our office to plan their estate, they often have a lot of questions about qualified domestic trusts (QDOTs) – especially if they own a significant amount of property or assets. Below, we’ve shared the answers to the most common questions we answer during estate planning consultations in which one member of a couple is a non-U.S. citizen.
What is a QDOT?
A Qualified domestic trust is a very specific type of trust that may be created in the instance that a U. S. citizen would like to protect his or her assets from estate and gift taxes for a spouse, in the event of his or her death.
Who benefits from creating a QDOT?
QDOTs are ideal for international couples that have more than $5 million in assets. You do not need to create a QDOT if you and your spouse are both American citizens or if you and your non-U.S. citizen spouse do not have enough assets to be affected by federal estate taxes.
Do QDOTs have any rules or regulations?
Yes. QDOTs have a number of rules designed to keep large sums of money and property from someone who is not a citizen – at least before that money and property is taxed. For example, a QDOT must have at least one trustee that is a United States citizen, a domestic bank, or a domestic trust company. If the QDOT is worth more than $2 million, it must have a domestic bank for a trustee. In addition, the trustee must approve all principal distributions.
Can a spouse receive principal distributions from his or her QDOT?
Unfortunately, unlike many other marital trusts, a spouse cannot receive a principal distribution from the trust without having the money subjected to federal estate taxes. However, a spouse can receive interest distributions without having the money taxed (besides regular income taxes). One rare exception is if the spouse is undergoing a hardship and needs funds for a financial or medical emergency.
Can’t I just transfer money to my spouse before my death?
Unfortunately, because your spouse is not a United States citizen, any transfers over a certain amount is subject to a gift tax. If your spouse was a citizen, he or she could accept an unlimited amount of assets before your death.
Can we avoid creating a QDOT and still avoid the estate tax?
One alternative to creating a QDOT is to have the non-U.S. citizen spouse become a citizen. If this is possible, if you have the time to do so, and if your spouse wishes to become a citizen, this solution could well be preferable to the QDOT solution: when you are both citizens, you will receive an unlimited marital deduction: you will be able to transfer any amount of property and any assets between spouses, during your lifetime or in the event of a death, without being subject to gift taxes or estate taxes.
I still have questions about QDOT – what do I do?
To get all of your questions answered, and to ask questions about your personal situation, call The Law Office of Janet Brewer and request a consultation today: (650) 325-8276. We are dedicated to helping international couples plan their estates and plan their future.