By 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.
