Marital Deductions - Qualified Domestic Trust

Qualified Domestic Trust (QDOT)
A QDOT is a qualified domestic trust that is used to allow a non-U.S. citizen who is the spouse of a U.S. citizen to qualify for the unlimited marital deduction to keep the estate from being subject to federal taxes upon the first death. In order to protect the spouse that is not a U.S. citizen, a QDOT is set up; however, it must meet certain qualifications:

  • 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.

The result is that, if your spouse is not a U.S. citizen and you do not plan ahead, everything in your estate over the amount of the estate tax exemption will be subject to estate taxes. The assets that are transferred to this trust are not taxed with the event of the first death, so the entire estate is available to provide for the surviving spouse. The trust owns the assets, but the spouse can receive income from the trust and, with the trustee's approval, may also receive principal. The income received from the QDOT is taxed as ordinary income in the year it is received. But any principal received (unless the distribution is due to "hardship" as defined by the IRS), plus assets remaining in the QDOT at the second death, will be taxed as if they were part of the first decedent's estate (at the highest estate tax rate).

Without a QDOT, these estate taxes would have to be paid at the first death. But with a QDOT, the taxes are delayed until the surviving spouse dies, which means more assets are available to provide for the spouse.

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