QUALIFIED DOMESTIC TRUST "QDOT"
One of the most important estate tax planning tools available to married couples is the unlimited marital deduction. This deduction allows one spouse to pass an unlimited amount of property to the other spouse without incurring any Federal estate or gift taxes. It permits deferral of estate taxes on the property until the surviving spouse disposes of it, either by gift or at death. The estate of the surviving spouse is then entitled to the standard unified credit exemption (currently $3.5 million in 2009) and excess amounts are subject to Federal estate taxes up to 50 percent.
What if one spouse or both spouse's are not citizens of the United States?
Up until 1988, non-citizen spouses could use the marital deduction and then move back to their native countries with the property. But that year, Congress changed the laws to generally disallow any marital deduction for an inheritance received by a surviving non-citizen spouse.
Without the marital deduction, spouses who are not US citizens, but resident aliens) can only receive the current federal exemption amount ($3.5 million in 2009) from their spouses free from Federal estate and gift taxes. Every US resident, regardless of citizenship, gets the united credit exemption. Unfortunately, any assets over that amount may be substantially reduced by taxes, resulting in the depletion of funds available for the spouse's support. Non-resident aliens, in contrast, are only allowed to transfer $60,000 prior to being taxed.
Lifetime gifts to non-citizen spouses are also subject to restrictions. While there is no limit on the amount of money that a husband and wife who are citizens can receive tax-free from each other during their lifetimes, the maximum annual gift amount to a non-citizen spouse is reduced. Gifts exceeding the allowable amount (currently $170,000) in any year will either reduce the donor spouse's united credit or result in a gift tax if his or her unified credit has been previously consumed.
Special Trust Provides Relief: A special marital deduction is permitted however, for property passing at the death of one spouse to a surviving non-citizen spouse if that property is put into a qualified domestic trust (QDOT) for the benefit of the surviving spouse. Properly structured, a QDOT can postpone estate taxes until the death of the second spouse. The QDOT is similar to the unlimited marital deduction used by couples who are both citizens.
Under the QDOT rules, which are detailed and complex, the inherited property is not subject to estate tax so long as it stays in the trust. Here's how it works:
A QDOT is typically created in a Will or separate Trust document prior to the death of the first spouse. Once the assets are transferred to the trust, the surviving spouse is entitled to receive the income from the trust free from estate taxes. When the trust terminates, usually at the death of the surviving spouse, the QDOT must pay estate taxes calculated as if they were a part of the taxable estate of the first deceased spouse.
Watch out for Restrictions: As with most trusts, the QDOT is subject to a host of restrictions which can cause trouble for the unwary. For instance, any distributions of principal to the non-citizen spouse are subject to estate taxes and the trustee must withhold funds equal to the tax. The estate tax is determined at the highest rate applicable to the deceased spouse's estate. Exceptions are made for principal distributions due to hardship. Thus, if the surviving spouse takes the principal for an immediate and substantial financial need relating to his or her health, education, or support or the needs of a child or other person whom he or she is legally obligated to support, no estate taxes will be imposed. Another concern is the trustee must be a US citizen or corporation. This means the surviving non-citizen spouse cannot control the trust assets.
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One of the most important estate tax planning tools available to married couples is the unlimited marital deduction. This deduction allows one spouse to pass an unlimited amount of property to the other spouse without incurring any Federal estate or gift taxes. It permits deferral of estate taxes on the property until the surviving spouse disposes of it, either by gift or at death. The estate of the surviving spouse is then entitled to the standard unified credit exemption (currently $3.5 million in 2009) and excess amounts are subject to Federal estate taxes up to 50 percent.
What if one spouse or both spouse's are not citizens of the United States?
Up until 1988, non-citizen spouses could use the marital deduction and then move back to their native countries with the property. But that year, Congress changed the laws to generally disallow any marital deduction for an inheritance received by a surviving non-citizen spouse.
Without the marital deduction, spouses who are not US citizens, but resident aliens) can only receive the current federal exemption amount ($3.5 million in 2009) from their spouses free from Federal estate and gift taxes. Every US resident, regardless of citizenship, gets the united credit exemption. Unfortunately, any assets over that amount may be substantially reduced by taxes, resulting in the depletion of funds available for the spouse's support. Non-resident aliens, in contrast, are only allowed to transfer $60,000 prior to being taxed.
Lifetime gifts to non-citizen spouses are also subject to restrictions. While there is no limit on the amount of money that a husband and wife who are citizens can receive tax-free from each other during their lifetimes, the maximum annual gift amount to a non-citizen spouse is reduced. Gifts exceeding the allowable amount (currently $170,000) in any year will either reduce the donor spouse's united credit or result in a gift tax if his or her unified credit has been previously consumed.
Special Trust Provides Relief: A special marital deduction is permitted however, for property passing at the death of one spouse to a surviving non-citizen spouse if that property is put into a qualified domestic trust (QDOT) for the benefit of the surviving spouse. Properly structured, a QDOT can postpone estate taxes until the death of the second spouse. The QDOT is similar to the unlimited marital deduction used by couples who are both citizens.
Under the QDOT rules, which are detailed and complex, the inherited property is not subject to estate tax so long as it stays in the trust. Here's how it works:
A QDOT is typically created in a Will or separate Trust document prior to the death of the first spouse. Once the assets are transferred to the trust, the surviving spouse is entitled to receive the income from the trust free from estate taxes. When the trust terminates, usually at the death of the surviving spouse, the QDOT must pay estate taxes calculated as if they were a part of the taxable estate of the first deceased spouse.
Watch out for Restrictions: As with most trusts, the QDOT is subject to a host of restrictions which can cause trouble for the unwary. For instance, any distributions of principal to the non-citizen spouse are subject to estate taxes and the trustee must withhold funds equal to the tax. The estate tax is determined at the highest rate applicable to the deceased spouse's estate. Exceptions are made for principal distributions due to hardship. Thus, if the surviving spouse takes the principal for an immediate and substantial financial need relating to his or her health, education, or support or the needs of a child or other person whom he or she is legally obligated to support, no estate taxes will be imposed. Another concern is the trustee must be a US citizen or corporation. This means the surviving non-citizen spouse cannot control the trust assets.
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