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
- 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.
Sample Questions 1 - 4
RetirementAs rules and exemptions tied to the estate tax change, so should your estate plan. Here's why updating it is so important.
RetirementTrusts, wills, taxes and rules differ by country. Find out what you need to know about estate plans in Canada.
RetirementThis is how disclaimer trusts work and when it makes sense to use them in an estate plan.
Managing WealthDon't let unexpected taxes eat away at your inheritance or burden your heirs.
Financial AdvisorInheritance is a double-edged sword, as leaving money can create estate tax burdens. Opting for a life insurance plan can help mitigate those burdens.
Managing WealthTrusts are an estate plan's anchor, but the terminology can be confusing. We cut through the clutter.
TaxesInheritance taxes can be tricky. Most people have to deal with them at a very inconvenient time. It's better to learn the laws now so you're ready later.
Financial AdvisorThe estate tax is frequently misunderstood. Learn more details about exactly how estate, or inheritance, taxes work in the United States.
Managing WealthYou don't have to be rich to make use of a trust fund. Rules can be complex; here's what you'll need to discuss with your lawyer.