Estate Planning

Qualified Domestic Trusts

The Estate Planning lawyers at the Elder & Disability Law Center provide comprehensive estate planning advice and legal services to individuals and families in the Washington, D.C., area, Maryland, and Virginia. Please contact us for a consultation a qualified domestic trust or any other estate planning option.

Different estate and gift tax issues arise among married couples depending if one or both spouses are not citizens of the U.S. For example, there is no gift tax on any amount gifted between two U.S. citizen spouses. However, a spouse can only give up to $120,000 a year to a non-citizen spouse without being subject to the gift tax. An experienced International Estate Planning lawyer can help you navigate the maze of international estate and gift tax laws.

If your spouse is a non-citizen, then there are estate taxes to consider. Non-citizens are not able to take advantage of as many tax shelters as U.S. citizens. A resident non-citizen spouse can defer the tax on his/her inheritance upon the death of their spouse with a qualified domestic trust (QDOT) for the benefit of the surviving spouse. The surviving spouse is able to receive income from the trust. However, the surviving spouse will incur estate tax at the tax rate in place at the time of their spouse’s death upon two taxable events: the surviving spouse withdraws from the principal or the surviving spouse passes away.

The basic requirements of a QDOT are:

• The QDOT must have at least one trustee who is an individual U.S. citizen or a domestic corporation.
• The executor of the estate must make an irrevocable QDOT election to qualify for the marital deduction on the federal estate tax return within 9 months from the date of death.
• If the QDOT has assets equal to or less than $2,000,000, then no more than 35% of the value can be in real property outside of the United States or else:
  1. The U.S. trustee must be a bank,
  2. The individual U.S. trustee must furnish a bond for 65% of the value of the QDOT assets at the transferor’s demise, or
  3. The individual U.S. trustee must furnish an irrevocable letter of credit to the U.S. government for 65% of the value.
• If the QDOT has assets exceeding $2,000,000 either:
  1. The U.S. trustee must be a bank,
  2. The individual U.S. trustee must furnish a bond for 65% of the value of the QDOT assets at the transferor’s demise, or
  3. The individual U.S. trustee must furnish an irrevocable letter of credit to the U.S. government for 65% of the value.

Any distributions of principal to the non-citizen spouse are subject to estate taxes, and the trustee must withhold funds equal to the tax. However, exceptions are made for principal distributions due to an immediate and substantial financial need relating to the spouse’s health, education or support, or the needs of a child or other person who the spouse is legally obligated to support.

Any property that the deceased spouse transfers to the surviving spouse outside of the QDOT (e.g. through a will) may be transferred to the QDOT without being subject to estate tax if the property is transferred prior to the estate tax return due date. However, real estate transfer and/or recordation taxes may still apply if real property is transferred to the QDOT.

If the will does not provide for a QDOT, the executor or the surviving spouse may elect to establish a QDOT and transfer the assets to the trust before the date on which the tax return is due. However, creating a QDOT in advance will ensure that your estate is handled in the manner that you desire, and also ensure that you have provided for your spouse. Consult with an experienced International Estate Planning attorney at the Elder & Disability Law Center to learn more about setting up a QDOT and other estate planning issues.