If you have a spouse and are doing some estate planning, you may wonder about the difference between a QTIP and a QDOT. The two have a few things in common: both are trusts leaving assets to the surviving spouse, and both help preserve availability of the marital deduction.
What Is a QTIP?
A QTIP (qualified terminable interest property) is a special kind of trust that allows married people to control distribution of assets to their spouses while still taking advantage of the marital deduction. A QDOT allows the same, but is usually used by couples that have one U.S. citizen and one non-citizen spouse. Any married couple can use a QTIP.
In a QTIP, one spouse decides when the other spouse can receive trust distributions, and in what amount. Those decisions are memorialized in a trust document. If the first spouse passes away first, then the second spouse can receive distributions from the trust.
Usually, the IRS does not assess taxes on money passed directly to a surviving U.S. citizen spouse. The spouse must have full, unrestricted ownership of the money. But a special law allows QTIP creators to take advantage of the marital deduction and still pay no taxes. The QTIP benefit is available as long as the surviving spouse has a lifetime interest in income from the trust.
What Is a QDOT?
A QDOT (qualified domestic trust) is a special kind of trust often used when one spouse is not a United States citizen. Because that spouse is not a citizen, he or she cannot take advantage of the marital deduction. The marital deduction is a tax provision that allows spouses to make unlimited transfers of property to one another without paying gift, estate, or transfer taxes, both during their lifetimes and afterwards.
Without the marital deduction, non-citizen spouses who inherit property from citizens could pay very expensive estate taxes – not to mention gift taxes on lifetime transfers. The QDOT can solve part of the problem.
When a U.S. citizen places property in a QDOT, he or she should name the non-citizen spouse as beneficiary. The IRS allows non-citizen beneficiaries of QDOTs to receive the benefit of the marital deduction – meaning fewer expensive estate taxes if the U.S. citizen passes away first. If the non-citizen spouse receives distributions from the QDOT at some point after the citizen’s death, he or she may owe taxes on those amounts. But the QDOT leaves the spouse in a better position than if he or she had inherited the trust assets outright.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.