For spouses with international backgrounds, qualified domestic trusts (QDOTs) may help with estate and tax planning for their futures. QDOTs are a great tool for a United States citizen to protect assets for a spouse who is not a U.S. citizen.
A qualified domestic trust is a special kind of trust with special rules about trustees and distributions. In exchange for following these rules, spouses get protection from paying estate and gift taxes that the government would otherwise require.
Special Rules for QDOTs
QDOTs work like traditional trusts in that they have one or more trustees, property that is transferred by an individual into trust, and a beneficiary (who is often the non-citizen spouse). Unlike a traditional trust, a qualified domestic trust must have at least one trustee that is a U.S. citizen, a U.S.-based bank, or a trust company formed in the U.S. If the QDOT holds more than $2 million in assets, it must have a domestic bank as one of its trustees.
The trustee(s) of a QDOT must approve all principal distributions, meaning distributions to the beneficiary of assets that were originally contributed by the U.S. citizen spouse who formed the trust. If a principal distribution is made, it will be subject to federal estate taxes. The only exception is in cases of exceptional hardship when the non-citizen spouse needs money in an emergency. However, if a distribution of interest is made from a QDOT, the non-citizen spouse only has to pay regular income taxes on it.
Protections Offered by QDOTs
QDOTs can protect non-citizen spouses from paying large amounts of estate taxes when their U.S. citizen spouses pass away. They are useful primarily for international couples who have assets exceeding $11.18 million, because that is the current estate tax exemption for an individual citizen.
When one spouse is not a citizen, the couple cannot take advantage of the marital deduction. This tax deduction allows spouses to transfer assets to each other tax-free. If the citizen spouse dies and the other spouse does not become a citizen by the time the deceased spouse’s estate tax return is filed, he or she cannot receive the marital deduction. This will mean an expensive tax bill, either on the deceased spouse’s estate or for the non-citizen who receives assets in the spouse’s will or during his or her lifetime. The QDOT works around this problem by holding all or a portion of the estate in trust for the non-citizen.
Do you have more questions about forming a qualified domestic trust as part of your estate plan? 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.