Qualified Domestic Trust (QDOT)

QDOTs are a type of trust commonly used by couples when one of the couple is a non US citizen. Non US citizen spouses are subject to restrictions on annual gifts and spousal transfer that US citizen spouses are not. Non US citizen spouses do not benefit from unlimited marital transfer which creates a potential estate tax burden for the surviving non US citizen spouse unless planning measures are taken. One such measure is the QDOT. A QDOT allows for a person to transfer property out of his or her estate into trust, and have the yield/growth of the trust property be paid to their surviving spouse over the lifetime of the surviving spouse.

Settling property into a QDOT for the benefit of your non US citizen spouse allows those assets to avoid estate tax if certain conditions are met.

1) The trustee must be a US citizen or corporation.

2) The trust must retain the right to withhold estate tax on distributions.

3) The estate executor must make an election on the estate tax return. The election is irrevocable.

4) The Trust meets the “security” requirement to ensure the rightful collection of any estate taxes owed. The US Trustee must furnish a bond in favor of the Internal Revenue Service in an amount equal to 65 percent of the fair market value of the trust assets (determined without regard to any indebtedness with respect to the assets) as of the date of the decedent’s death.

5) There cannot be any beneficiaries to the Trust other than the surviving spouse during the lifetime of the surviving spouse.

6) If the trust property value exceeds 2,000,000 USD one of the trustees must be a US bank or Trust company. If the trust value is less than 2,000,000 USD then no more than 35 percent of the trust assets can be real property located outside the United States, or the Trust can elect to meet the requirement for  >2,000,000 USD Trusts instead.

7) The laws of a US state must govern the trust.

Mr. and Mrs. Client were a wealthy professional that never had children. Mr. Client knew that his wife would outlive him due to the age difference between then and planned accordingly with his advisor. When Mr. Client eventually passed, the executor of Mr. Client’s estate made an election on Mr. Clients estate tax form to have 7,000,000 USD in securities put into a QDOT for the benefit of his surviving spouse, Mrs. Client who is a Japan passport holder. Removing 7,000,000 USD from Mr. Client’s estate brought his estate size down to a value below his remaining universal credit, and no estate taxes are paid. Mrs. Client receives Mr. Clients other assets directly, free from US tax. In accordance with the trust instrument the Trustee invests the trust principal into income producing assets with the intention of producing maximal yield, (even at the expense of capital growth) to support Mrs. Client throughout the rest of her natural life, with provisions for hardship distributions written into the trust in case, for whatever reason, the assets that she inherited directly are depleted. When Mrs. Client dies, the assets of the QDOT will be included in her estate and subject to US tax where appropriate.