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By Nancy Burner, Esq.

Nancy Burner, Esq.

When creating estate planning documents for clients, a common concern is how to protect the beneficiaries of the estate.

When it comes to providing creditor protection for oneself, there are not many estate planning options available, aside from giving assets away. This could result in undesired consequences, such as the loss of ownership of the assets or creating a taxable event. Fortunately, this is not the case for beneficiaries — there are certain planning techniques to provide beneficiaries with creditor protection, and other protections, that one would otherwise not be able to provide for themselves.

The Internal Revenue Code states that if a trust limits the distribution of principal to an ascertainable standard, the trust qualifies as a creditor protected trust. Limiting distributions to the beneficiary for their health, education, maintenance, or support (HEMS) falls within the IRS guidelines of an ascertainable standard that creates creditor protection for the beneficiary. 

While this type of trust may sound restrictive, the trust can essentially be used to maintain the beneficiary’s lifestyle. The principal of the trust can be used to pay for the beneficiary’s schooling, rent, taxes, medical expenses and more. 

Additionally, assets, such as a real property, can be bought directly in the name of the trust, thus protecting the assets immediately upon purchase. Lastly, the beneficiary can be their own trustee of the trust and have the right to withdraw the income generated from the trust, all while still maintaining creditor protected status.

If there is a concern that the beneficiary may want or need access to the trust beyond HEMS distributions, or that the trust may become too burdensome or impractical to manage, the estate planning document creating the trust can provide various ways to either completely undo the trust or to authorize a distribution of principal beyond the beneficiary’s health, education, maintenance, or support.

Aside from creditor protection, there are additional benefits that come with beneficiary trusts. If, for example, there is a concern that a beneficiary may end up with a taxable estate, any assets transferred to them in trust will not be includable in the beneficiary’s estate.

This could help reduce, if not eliminate, a large estate tax on the beneficiary’s death. Another benefit is the ability for the creator to maintain control of the distribution of trust assets should the beneficiary die before the complete distribution of their trust. 

If the beneficiary is unable to manage their personal finances for any reason, the document can name someone other than the beneficiary to be the Trustee of the trust. The document can include specific instructions on how to administer the trust, thus ensuring that the beneficiary is properly cared for and that assets of the trust will last for an extended period of time.

Beneficiary trusts can exist both within a last will and testament, also known as a testamentary trust, as well as a free-standing living trust. Either document can take advantage of this powerful tool.

Because it is not always immediately clear whether a beneficiary trust or outright inheritance is the right distribution method, it is important to meet with your estate planning attorney and provide them with as much information as possible in order for them to properly advise on the creation of your documents.

Nancy Burner, Esq. is the founder and managing partner at Burner Law Group, P.C with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.

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By Nancy Burner, Esq.

Nancy Burner, Esq.

Not all estates require a probate or full administration proceeding. A small estate proceeding,  also known as a Voluntary Administration, is a simplified Surrogate’s Court procedure. 

What estates qualify?

The  Voluntary Administration is available if the decedent passed away with $50,000 or less in  personal property. Personal property includes cars, cash, stocks — anything but real estate. The Voluntary Administration proceeding is not an option when the decedent owned real  property solely in their own name. It is available if the decedent died with or without a Will.  

Voluntary Administration is not only for decedents who had minimal assets. Sometimes  only certain assets were owned by the decedent in their sole name. This happens often with  married couples with joint bank accounts or who own real estate with rights of survivorship. A decedent may have named beneficiaries on most of their accounts. In such cases only some  property needs to pass through Surrogate’s Court. Other times a decedent conveyed most, but not all, of their property to a trust. If the assets left outside the trust are less than  $50,000, a Voluntary Administration is available.  

How to file

The small estate proceeding is initiated by filing of an “Affidavit of Voluntary  Administration.” The Petitioner is either the nominated Executor in the decedent’s Will or  the closest living relative when there is no Will. The Petitioner is asking the Court for the  authority to collect the decedent’s assets, pay off any debts, and distribute the property to  those with a legal right to inherit. If there was a Will, the beneficiaries named in the Will  inherit. If there was no Will, then the estate passes under the laws of intestacy. 

The Voluntary Administration Proceeding is less complex than a probate or full  administration proceeding. Consent and Waiver is not required from the decedent’s  distributees (heirs who will inherit under the estate). The Court only provides the  distributees with notice that the proceeding was filed. This avoids the expense of costly  litigation over the appointment of a fiduciary.  

Drawbacks

The Voluntary Administration Proceeding has some drawbacks. The appointed  Administrator only has the authority to collect the specific assets listed on the Affidavit of  Voluntary Administration. Such broad authority is only available in a full probate or  administration proceeding. The Administrator does not have the broad authority to collect  and distribute any additional assets. If the Administrator finds assets not listed on the initial Affidavit, they have to go back to the court. 

Further, if the assets exceed $50,000, the Administrator must convert the proceeding to a full probate or Administration. For this reason, when there is uncertainty about the assets, it may be wise to proceed with a full  probate or administration proceeding.  

A small estate proceeding costs only $1 to file. While the Voluntary Administration  Proceeding is simple and inexpensive, mistakes can be costly. It is always a good idea to  consult with an experienced Estate attorney to ensure that a small estate proceeding is the  best way to proceed. 

Nancy Burner, Esq. is the founder and managing partner at Burner Law Group, P.C with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.

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Living Trust. METRO photo

By Nancy Burner, Esq.

Nancy Burner, Esq.

A key tool in the estate planner’s toolbox is a living trust. The term “living trust” refers to a document created during life that establishes a legal entity which can own certain assets.  The term differentiates a living trust from a “testamentary trust,” which is created after death. A further distinction to be made is whether the trust is Revocable or Irrevocable. Regardless of the title of the trust, the terms of the document will dictate the rules of how the assets in trust are managed and what control is retained by the trust creator.

A revocable trust leaves the creator with complete control over trust assets. The creator can be named as trustee with the power to revoke, amend, and restate the trust. Further, the creator’s Social Security number is used for the trust’s estate and income tax reporting. The main purpose of creating a revocable trust is to avoid court involvement after death. 

Assets that are not in a trust, do not have a joint owner, and do not name a beneficiary, require a court process after death. For those assets, the New York State Surrogate’s Court process is called probate, if the deceased person had a will, and administration, if they died without a will. There are several reasons to avoid the court after death, varying from disinheriting family members or not knowing your family, to owning property in multiple states or having disabled beneficiaries. For these and other purposes, the creation of a trust is often recommended.  

Beyond revocable trusts, circumstances may dictate the creation of an irrevocable trust. Irrevocable trusts are those that are written in a way to limit the creator of the trust in some fashion. The exact limitations will depend on the goals of the trust.  Common reasons to create an irrevocable trust are for Medicaid planning purposes or estate tax planning.  

For estate tax planning, two such trusts are an Intentionally Defective Grantor Trust (“IDGT”) and a Spousal Limited Access Trust (“SLAT”). Assets owned by an IDGT are removed from the creator’s estate, placing the growth outside of their taxable estate while taxing the income to the creator.  A SLAT is an irrevocable trust created by one spouse for the benefit of the other. The SLAT can provide income and principal distributions to the spouse and other beneficiaries. While the contributing spouse makes an irrevocable gift to the trust and gives up any right to the funds, the beneficiary spouse and other beneficiaries are provided immediate access to the gifted funds. Both the IDGT and SLAT are tools for claiming the benefit of the current Federal estate tax exemption ($12.06 million in 2022) before it expires.

Most people do not realize that the death benefit of life insurance is taxable in your estate. Creating an Irrevocable Life Insurance Trust (“ILIT”) and transferring policy ownership to the trust removes the death benefit from the taxable estate. This also provides liquidity to pay any taxes imposed on the balance of the estate.

If the goal is to protect assets while obtaining eligibility for Medicaid benefits, it may be prudent to create a Medicaid Asset Protection Trust (“MAPT”).  Under this type of trust, the creator should not be the trustee.  While the creator can receive income distributions, they are restricted from accessing principal of the trust.  

All trusts, whether revocable or irrevocable, can avoid court process after death so long as the document is drafted and funded properly. The type of trust and exact terms can be determined by an estate planning attorney to ensure the client’s specific circumstances and goals are considered. 

Nancy Burner, Esq. is the founder and managing partner at Burner Law Group, P.C with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.

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By Nancy Burner, Esq.

Nancy Burner, Esq.

The legalities surrounding a Last Will and Testament stem from Roman times, when six witnesses affixed their personal seals to a will. The will was later validated by examining these seals to make sure they remained intact. 

Today we use staples instead of seals, but, because the probate process remains so formal, many misconceptions exist. Let’s discuss some of the more prevalent myths surrounding probate that we encounter.

Myth: If I have a will, my estate doesn’t have to go through Probate.

While a will documents where your assets go at death, a will does not avoid probate. Probate is a Surrogate’s Court proceeding whereby a decedent’s Last Will and Testament is validated and given effect. 

In New York, a will is admitted to probate after the Executor files a petition. The probate petition includes the original will, as well as a death certificate and funeral bill. Proper notice must be given to the individuals who would have inherited had the decedent died without a will. 

The court issues “letters testamentary” which give the executor the authority to act. The executor opens an estate bank account, pays the debts of the estate and then makes distributions to the beneficiaries.

The only way to avoid probate is to place all assets into a trust or die owning only “non probate assets.” Non-probate assets are those held jointly or that list beneficiaries. Common non-probate assets with beneficiary designations are retirement accounts and life insurance policies. Not all types of accounts allow designated beneficiaries or transfers on death. Naming others as joint owners can have catastrophic drawbacks, such as capital gains tax and creditor issues. A revocable trust is the gold standard in avoiding probate.

Myth: I don’t need a will because my spouse will inherit everything.

The only way your spouse inherits everything is if you do not have children or grandchildren. People are often surprised to learn that if they have children, their spouse does not inherit all their assets. 

In New York State, if someone is married with children and dies without a will, their spouse gets the first $50,000 and half of the remaining assets. The children split the other half amongst themselves. This means that without a will, minor children or children from a previous marriage inherit almost half of your assets. 

This is not what most people expect or want. The only way to make sure your spouse inherits 100% of your assets is to draft a will or trust. 

The probate process can be avoided if the couple owns all assets jointly. Joint ownership has its own problems — especially considering estate taxes or if there are children from a previous marriage. 

The probate process may sound confusing, but the procedure is easy and orderly with the help of an estate attorney. One of the kindest things you can do for your family is to draft a well-thought-out estate plan so that your assets pass in an orderly manner. At Burner Law Group, we charge flat fees so that clients fully understand their options and receive an estate plan custom tailored to them.

Nancy Burner, Esq. is the founder and managing partner at Burner Law Group, P.C with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.

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By Nancy Burner, Esq.

Nancy Burner, Esq.

Spring is here and so is tax season. The income tax filing deadline this year is April 18, 2022. You have likely been gathering your documents or filing an extension. Since you are already working on putting your affairs in order, this is the perfect time to finally check estate planning off your to-do list. Why is now the best time to do estate planning when you are already stressed out about your tax documents?

You are already organized

You are already organizing your financials — expenses, bank accounts, 1099s. This is the same information you need to disclose to an estate planning attorney. Your estate just means “everything you own.” Your estate includes real property, bank accounts, retirement accounts, stocks and bonds, life insurance, business interests and any other valuables assets such as jewelry and art.

Maximize gifting next year 

If your income taxes are high or you regularly give money to family members, there may be a better way to maximize gift tax benefits. In 2022, individuals can gift up to $16,000 per year to as many people as they wish without incurring estate or gift tax. The recipient isn’t taxed on the amount received either. Individuals can also pay for other’s education and medical expenses estate and gift tax free. Although the federal exemption is very high right now at $12.06 million, it is set to sunset to $5.9 million in 2026. Estate planning attorneys can help you leverage this historically high exemption before it goes down.

Business succession planning 

If you own a business, you have likely already completed your returns. But have you thought about what would happen to your business if you became ill or passed away? Business succession planning is an integral part of estate planning — especially for small businesses. If you have any questions about your business structure, key person insurance or tax efficiency, now is the time to set up a meeting.

Save on income taxes

If your income taxes are too high, there are efficient ways to lower them. You can make donations to charity or transfer certain income generating assets to family members.

Changes in the law

Now is also a good time to review existing wills and trusts in light of upcoming changes in estate law. Do your beneficiary designations on your retirement accounts still make sense after the passing of the SECURE Act? If it has been more than a few years, you will want to make an appointment to review your documents with your attorney.

Protect your family 

Doing estate planning is one of the kindest things you can do for those you leave behind. Taking the time now to protect your family eases their burden later. If you have minor children or beneficiaries with special needs, estate planning is crucial.

An estate planner can draft an estate plan tailored to your situation — from simple wills and revocable trusts to asset protection planning — and organize your estate planning documents so everything can be kept safely in one place. We cannot know the future, but we do know that there is no way to avoid death or taxes.

Nancy Burner, Esq. is the founder and managing partner at Burner Law Group, P.C with offices located in East Setauket, Westhampton Beach, New York City and East Hampton.

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By Nancy Burner, Esq.

Nancy Burner, Esq.

Although cryptocurrencies like bitcoin have gone mainstream, non-fungible tokens (NFTs) were relatively unknown until 2021. You may have heard about “Bored Apes,” “Crypto Kitties” or that artist Beeple sold an NFT for $69 million. If you do not exactly understand what an NFT is, you are not alone.

Unlike cash, which is interchangeable, non-fungible items are one of a kind. An NFT is a unique digital asset built on a blockchain that comes with the right to use it. An NFT can be a photograph, animation, graphic image, video, meme, tweet, or anything digital. The value of the NFT lies in its uniqueness, which is attributable to its traceability on the blockchain.

The easiest to understand use of NFTs is when they represent real-world assets or serve as certificates of authenticity. For example, Nike distributing an NFT with every sneaker to protect against counterfeiting. Owning a multi-million dollar digitally generated avatar is a bit harder to grasp. But 1 out of 10 Americans invested in NFTs in 2021, so even if the appeal escapes you, the concept of scarcity should be familiar.

What to do if your grandson gifts you an NFT for Christmas or grandma sends an NFT as a birthday present? Keep the password safe! NFTs reside in “digital” wallets, which are stored on a computer, flash drive, or an app on your phone. You must have the private key or seed phrase (at least 12 unrelated words) to access the wallet. This private phrase is the only way to retrieve the NFT.

Whether you buy the NFT or it is gifted, the basis in the asset is the purchase price. Just like stock or real estate, the basis (purchase price) is used to calculate the capital gain or loss for tax purposes when the item is sold. Likewise, the NFT gets a step up in basis to fair market value at the owner’s death.

NFTs pass like any other asset at death — if you can find them. Unless the private key is known, there is no way of accessing and gaining ownership. We recommend redundancy. Write the phrase down and store it some place safe, keep it in a password protected file on a computer and flash drive. Since there is no central repository to verify ownership of an NFT, we advise clients to make specific bequests of an NFT in their wills. Calling attention to it ensures that the Executor at least knows of its existence. Do not include the password of course, since a will becomes public after probate!

You can also hold an NFT in a Trust or Limited Liability Company (LLC). An NFT cannot be retitled in the name of a Trust — but you can transfer the NFT on paper, much like we do with stocks and LLC interests. Some practitioners champion using an LLC because it is easier to transfer compared to transferring the NFT on the blockchain. However, avoiding recording the transfer on the public ledger defeats the purpose of transparency and authenticity. There are other advantages to an LLC to consider, such as transfer tax discounts and asset protection.

The future use, value, and regulation of NFTs is unknowable. Perhaps one day your Last Will & Testament will be stored in a digital wallet. For now, just make sure to disclose NFTs to your estate planning attorney, so she can incorporate them into your estate plan.

Nancy Burner, Esq. is the founder and managing partner of Burner Law Group, P.C. focusing her practice areas on Estate Planning, Elder Law and Trusts and Estates. Burner Law Group P.C. serves clients from Manhattan to the east end of Long Island with offices located in East Setauket, Westhampton Beach, NYC and East Hampton.Visit www.burnerlaw.com.

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By Nancy Burner, Esq.

Nancy Burner, Esq.

On January 1, 2020, as we entered another year without any idea of what was on the horizon, a new federal law took effect regarding retirement accounts. 

The SECURE Act, “Setting Every Community Up for Retirement Enhancement,” affects millions of Americans who have been saving through tax-deferred retirement plans with the biggest impact falling those set to inherit these plans. Now, two years later, SECURE is still a new concept for many clients who are unaware of the law or how it applies to their own situation.

One change is that the age at which a plan holder must take required minimum distributions (“RMDs”) was increased from 70 1⁄2 to 72. RMDs are taken annually, based on the full value of the account on December 31 of the prior year and the life expectancy of the plan holder. The delay to age 72 will result in a year and a half more of tax-deferred growth on the funds.

SECURE also created a $10,000 penalty-free withdrawal for someone giving birth to or adopting a child. The Act also expanded the ability for small business owners to offer retirement plan funding. However, the most drastic item in SECURE takes aim at the beneficiary of the plan after the death of the original plan holder.

Prior to SECURE, a non-spouse designated beneficiary had the option of converting the plan to an inherited IRA and taking a RMD based upon their own life expectancy. The beneficiary could take more than the RMD if needed, realizing that each distribution is taxable income. 

Consider a 90-year-old with an IRS life expectancy of 12.2 years who names a 65-year-old child as designated beneficiary. A 65-year-old has an IRS life expectancy of 22.9 years. That beneficiary could previously “stretch” the distributions over their life expectancy and allow those funds to grow tax-deferred for many more years. With SECURE, this stretch is lost for the majority of beneficiaries. SECURE prescribes a mandatory 10-year payout for a designated beneficiary. Being forced to liquidate in the 10 years will result in the payment of more income taxes than if the beneficiary had the 22.9-year payout.

The SECURE Act carved out limited exceptions to this 10-year payout rule. These five categories of designated beneficiaries include a spouse, minor child of the plan holder, chronically ill person, disabled person, or a person not more than 10 years younger than the plan holder.

If you have retirement assets, this change serves as a trigger to have your plan reviewed by your estate planning attorney and financial advisor. This review is especially important where an estate plan includes a trust as the beneficiary of a retirement account. The terms of the trust may need to be adjusted from being a conduit trust to an accumulation trust. 

A conduit trust forces all distributions out to the beneficiary, whereas an accumulation trust allows the distributions to remain protected in the trust. Other clients may decide to leave tax-deferred retirement assets to charities rather than individuals. Still others may rearrange allocations to make IRAs payable to a person not less than 10 years younger than them, such as a sibling, thereby focusing on saving other types of assets for beneficiaries otherwise forced to take a 10-year taxable payout.

Many Americans have spent their working lives contributing to tax-deferred plans with the idea that it will give them a stream of income in retirement, and pass on to their beneficiaries as a stream of income. While SECURE may not alter the plan for some, the impact of SECURE should be considered by all. Stay tuned for future updates because there are already whisperings about SECURE 2.0 which, among other things, may raise the age at which RMDs are required.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office. Visit www.burnerlaw.com.

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By Nancy Burner, Esq.

Nancy Burner, Esq.

As we enter a new year, it’s important that there is an understanding of the updated estate and gift taxes on both the federal and state level. 

The Tax Cuts and Jobs Act (the “Act”) increased the federal estate tax exclusion amount for decedents dying in years 2018 to 2025. The exclusion amount is for 2022 is $12.06 million. This means that an individual can leave $12.06 million, and a married couple can leave $24.12 million dollars to their heirs or beneficiaries without paying any federal estate tax. This also means that an individual or married couple can gift this same amount during their lifetime and not incur a federal gift tax. The rate for the federal estate and gift tax remains at 40 percent.

There are no 2022 changes to the rules regarding step-up basis at death. That means that when you die, your heirs’ cost basis in the assets you leave them are reset to the value at your date of death. 

The Portability Election, which allows a surviving spouse to use his or her deceased spouse’s unused federal estate and gift tax exemption, is unchanged for 2022. This means a married couple can use the full $24.12 million exemption before any federal estate tax would be owed. To make a portability election, a federal estate tax return must be timely filed by the executor of the deceased spouse’s estate. 

For 2022 the annual gift tax exclusion has increased to $16,000. This means that an individual can give away $16,000 to any person in a calendar year ($32,000 for a married couple) without having to file a federal gift tax return. 

Despite the large Federal Estate Tax exclusion amount, New York State’s estate tax exemption for 2021 is $5.93 million. As of the date of this article, the exact exclusion amount for 2022 has not been released. It is anticipated to be a little over $6 million in 2022. New York State still does not recognize portability.

New York has a three-year lookback on gifts as of January 16, 2019. However, a gift is not includable if it was made by a resident or nonresident and the gift consists of real or tangible property located outside of New York State; while the decedent was a nonresident; before April 1, 2014; between January 1, 2019, and January 15, 2019.

 Most taxpayers will never pay a federal or New York State estate tax. However, there are many reasons to engage in estate planning. Those reasons include long term care planning, tax basis planning and planning to protect your beneficiaries once they inherit the wealth. 

In addition, since New York State has a separate estate tax regime with a significantly lower exclusion than that of the Federal regime it is still critical to do estate tax planning if you and/or your spouse have an estate that is potentially taxable under the New York State law. 

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office. Visit www.burnerlaw.com

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LIVE WEBINAR: Burner Law Group, P.C. presents a free webinar titled 2022: The Year of Trusts on Thursday, Jan. 20 at 2:30 p.m. Attorney Britt Burner will discuss the anatomy of trusts, the types of trusts used in Estate and Medicaid planning and how they can benefit you and your loved ones. To RSVP, call 631-941-3434 or email [email protected].

 

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By Nancy Burner, Esq.

Nancy Burner, Esq.

Whether your trust requires its own EIN depends on the type of trust that you have. An Employer Identification Number (“EIN”) is a nine-digit number that the Internal Revenue Service (“IRS”) assigns to identify an entity for tax reporting purposes. An EIN, also known as a federal tax ID number, functions like a social security number.

Generally, revocable trusts do not need an EIN as they are grantor trusts and the trust’s income is reported on the tax return of the trust creator. If you have created a revocable trust, you may revoke the trust at any time and “regain” possession of the trust assets. Accordingly, a revocable trust is an extension of the grantor who created the trust. The grantor pays the income taxes generated by the revocable trust and uses the social security number of its grantor as its tax ID. Couples with a joint revocable trust both hold the power to revoke the trust, either person’s social security number can be used. A separate tax ID is necessary if they do not file taxes jointly.

A revocable trust becomes irrevocable at the grantor’s death. At that time, the trust requires an EIN, as the trust can no longer be associated with the deceased grantor’s social security number. The trust must file its own taxes.

Some lifetime irrevocable trusts are also grantor trusts and therefore taxed to the grantor just like a revocable trust. While it is not required for these trusts to maintain a separate tax ID, it is sometimes a good idea to assign same. We usually assign a federal tax ID when we do Medicaid Asset Protection Trusts. If an irrevocable trust is not classified as a grantor trust, an EIN is required as the trust is considered a “separate entity” from the grantor.

If your trust requires an EIN, an application is submitted to the IRS as soon as possible. The application contains information from the grantor and the trust to answer a series of questions for the IRS. A trustee can either apply online, or mail/fax IRS Form SS-4. If a trustee applies online, the EIN is available in a matter of minutes. If the application is completed by fax or mail, it may take a few weeks to receive the EIN.

Discuss any questions relating to the need of a separate tax ID for your trust with an experienced estate planning attorney or tax advisor. Since the income tax rate for a trust is usually so much higher than that for an individual, the question of how your trust is taxed is an crucial consideration when considering trusts.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office. Visit www.burnerlaw.com.

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By Nancy Burner, Esq.

Nancy Burner, Esq.

Couples who are both U.S. citizens receive the benefit of the unlimited marital deduction on federal estate and gift taxes. The idea is that the surviving spouse pays any estate tax at their death.

In contrast, transfers from a U.S. citizen to a non-citizen spouse do not enjoy this benefit. The IRS figures they may return home to their own countries and avoid U.S. estates taxes at their death. Instead, lifetime transfers to non-citizen spouse are only tax-free up to the annual exclusion amount –$159,000.00 in 2021.

Remember, with the current high federal estate tax exemption, a U.S. citizen can gift up to $11.7 million dollars during their lifetime or at their death to anyone, including a non-citizen spouse. But, for high net worth international couples or those planning for when the estate tax exemption is lowered, a Qualified Domestic Trust (“QDOT”) is as an exception to this rule.

A QDOT allows the marital deduction for property passing to a non-citizen surviving spouse. It does not avoid estate tax, just defers it until the surviving spouse’s death. The overall purpose is to ensure that the IRS will eventually be able to tax property for which a marital deduction is claimed.

The requirement that the surviving spouse place property in a QDOT ensures that if the marital deduction is allowed, the property will still ultimately be subject to death tax.

A QDOT, like a qualified terminable interest property trust (“QTIP”), mandates that all income be paid to the surviving spouse and that no other person have an interest in the trust during their lifetime. However, QDOTs have additional requirements and limitations, such as:

• At least one Trustee must be a domestic corporation or a U.S. citizen.

• The trust must be subject to and administered under the laws of a particular state or the District of Columbia.

• Property placed in the QDOT must pass from the decedent to the surviving spouse in a form that would have qualified for the marital deduction if the surviving spouse was a U.S. citizen.

• The trustee must have the right to withhold the estate tax and pay it to the IRS.

The IRS imposes different security requirements depending on if the assets in the trust exceed $2 million dollars, whether the trustee is a U.S. Bank, and what percentage of the trust property is located within the United States. These requirements ensure the IRS get its due on the surviving spouse’s death.

A QDOT can even be set up after the U.S. Citizen spouse passes away. A trust created for the spouse which fails to meet all of the requirements can be amended to qualify as a QDOT. Additionally, under certain circumstances, an executor can, with the permission of the surviving spouse, make an irrevocable election to a QDOT.

A QDOT would not be needed if the surviving spouse becomes a U.S. citizen before the deceased spouse’s estate tax return is filed. This is usually nine months from date of death, but can be extended six months. Multinational spouses should seek out an experienced estate planning attorney, as the rules are complex and always changing.

Nancy Burner, Esq. practices elder law and estate planning from her East Setauket office. Visit www.burnerlaw.com.

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