Under federal estate tax law, an individual can transfer their assets to a surviving spouse and such transfer will not be subject to an estate tax through the use of the unlimited marital deduction tax provisions. However, where the individual transfer’s assets to a spouse that is not a United States citizen, the unlimited marital deduction does not apply.
To avoid this result, such U.S. citizens with non-citizen spouses can have their estate planning attorney draft what is called a qualified domestic trust (QDOT) to avoid this result. If this so called QDOT is drafted then assets that are in this trust are eligible for the marital deduction. Here are some of the statutory requirements for creating a trust that qualifies as a QDOT:
Once the trust is drafted and fully executed, upon death of the maker (settlor of the trust) an election must be made on the decedent’s Form 706 estate tax return to treat the trust as a QDOT.
There must be at least one US citizen serving as trustee.
An estate tax is imposed on any distribution from a QDOT made before the death of a surviving spouse beneficiary, as well as on the value of the property remaining in the QDOT on the date of death of the surviving spouse. As a result, distributions made from the corpus of the trust must first have estate tax withheld from any distribution.
If the assets passing to the QDOT exceed $2 million (not including a personal residence with a value of up to $600,000), the QDOT must have either:
If the trust ceases to qualify as a QDOT, the fair market value of the property in the QDOT as of the date of disqualification will be taxed.
Distributions of income from the QDOT to the surviving spouse are not subject to the QDOT estate tax.
Distributions from corpus for hardship purposes are not subject to tax. If the surviving spouse has an “immediate and substantial” need for money relating to “heath, maintenance, education or support”—either his or her own, or that of someone he or she is legally obligated to support—a distribution of trust funds may qualify for a hardship exemption if the surviving spouse doesn’t have other reasonably available liquid assets.
However, even though hardship withdrawals are gift or estate tax free, they must be reported on Form 709-QDT.
The trustee is personally liable for the taxes imposed, so due care must be exercised by the trustee to avoid individual liability for any estate taxes.
The QDOT tax is due on the 15th day of the fourth month of the year after the year in which the distribution took place.
A six month extension can be requested under Section 6081(a) if the provisions of this section are met.
This is a very technical area of the tax law and the above is only an overview of some of the requirements. Creating a QDOT often involves millions of dollars and complicated IRS rules. Obviously, you’ll need advice from an experienced estate and tax attorney about the advisability and mechanics of setting up this kind of trust to insure the proper structuring and drafting of a QDOT.
Steven has been instrumental in helping my partner and I to create a secure and satisfying estate plan, which meets or exceeds all of our wishes and contains contingencies for everything from medical issues to wealth management and living wills. In this process, Steven has also become a friend. If you need Estate Planning, Tax Advice, a Will or a trust, etc., we highly recommend Steven Fromm, Esquire. He will listen and be sensitive to your unique situation.
Patrick, October 12, 2011