You may be starting to prepare for what happens to your family after you are gone. There are many different ways to set up a trust for your family and it all may get overwhelming at times. You may have heard of Qualified Domestic Trust (QDOT) and Qualified Terminable Interest Property Trust (QTIP) and are unsure which is best for you and your family.
If you are married to a spouse who isn’t a U.S. citizen, you may be considering a Qualified Domestic Trust. A Qualified Domestic Trust, often referred to as QDOT, is similar to a QTIP because they both allow anyone who is a taxpayer and that survives their spouse to take a marital deduction on estate taxes. However, a significant difference is that a QDOT allows a spouse to get a marital deduction, even if you aren’t a U.S. Citizen. Deciding which one is right for you can be complex to sort through on your own if you are hesitant about what each trust entails.
What is a Qualified Domestic Trust (QDOT)?
As stated, a qualified domestic trust is a trust that allows your surviving spouse, even if they aren’t a U.S. citizen, to take a marital deduction on your estate taxes. This makes QDOT a special trust that allows these deductions if assets are included in it. This makes a QDOT an equalizer, allowing non-citizens’ spouses the same rights as a U.S. citizen spouse to a tax deduction. This saves the non-citizen spouse from paying a hefty tax on the assets that are in the QDOT.
Without a QDOT, your spouse wouldn’t be able to own the asset, and an estate tax will be applied to the partner’s unused exemption amount. A QDOT is a good option so that your property and assets are placed in a trust for safekeeping, and when you pass, your spouse will get the distributions paid out to them.
Why Use a QDOT?
As previously mentioned, if you are married to someone who is not a U.S. citizen, in most cases, they will not be able to utilize any of the marital estate tax deductions that you set aside from them when you pass. The main reason you should use a QDOT is so your spouse can get your assets transferred to them in a legal and safe manner.
However, it is vital that you know and comply with all the requirements and regulations of a QDOT trust. Otherwise, if you don’t, you will make the trust invalid upon your death.
How do Qualified Domestic Trusts Work?
Under Section 2056A, from the IRS, your surviving spouse is qualified to have 100% marital deduction for any estate taxes that are owed on the asset. Meaning that, the spouse will not have to pay taxes on assets with no limits. Marital tax is not allowable if the spouse is not a U.S. Citizen. Additionally, there will be an estate tax exemption amount that your non-citizen partner will not be able to claim.
By creating a Qualified Domestic Trust, you are putting all your assets that will allow for the 100% marital deduction. While the spouse will not actually own any of the assets, they will still be able to benefit from the interest, financial accounts, and assets. To recap, once the assets are in the QDOT trust, the trust will own the assets instead of the surviving partner.
This allows for when your surviving spouse passes, then all the remaining assets in the trust will go to your children, friends, and charity. It will be important to note, then when this happens the assets will be transferred and there will be an estate tax that applies.
Limitations of a QDOT
It’s great that a QDOT allows your non-citizen spouse to be eligible for marital tax deductions from any assets that are inside the trust. However, it doesn’t exempt the trust from having to pay the taxes on the estate. A QDOT will only defer the tax until the death of your non-citizen spouse.
Once your non-citizen spouse passes, the state will then be liable for Section 2056A taxes on any of your assets that are in the trust even if there is or isn’t any surviving trustee. The downside to this is that it could reduce the value of the assets in the QDOT.
Requirements for a QDOT
If a QDOT is right for you and your family, here are the requirements you will have to meet in order to get one:
- The grantor must elect on the estate tax return to be able to treat the trust like a QDOT.
- The QDOT must meet Treasury regulations in regards to the collection of any tax.
- At least one trustee must be a U.S. citizen.
- Except for income, no distributions can be made to the trust.
Let the Experts Help
Whether it’s a straightforward trust for an individual or family that owns a single home, or a complex, high-net worth, estate plan involving multi-faceted structuring, lifetime gifting, valuations, and irrevocable trust strategies, Brackin & Johnson will provide you with the estate planning and trust solutions you need to protect your family legacy.
Contact Brackin & Johnson today to assist with all of your estate planning needs.