Qualified domestic trust

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Qualified Domestic Trust

A trust into which the trustor deposits funds and other assets to provide for a surviving, non-U.S. citizen spouse while also maintaining control of what happens to those assets after the surviving spouse dies. In a Q-DOT, the trustor names his/her surviving spouse as beneficiary and provides that income and/or principal from the trust shall pass to that spouse upon the trustor's death. This enables the surviving spouse to avoid estate taxes to which the non-American spouse would otherwise be subject. See also: Q-TIP.

Qualified domestic trust (QDOT).

If your spouse isn't a US citizen and your estate is large enough to risk being vulnerable to estate taxes, you can use a qualified domestic trust (QDOT) to allow your spouse to enjoy the benefit of the marital deduction until his or her own death.

In short, the marital deduction means that one spouse can leave the other all his or her assets free of estate tax. The inherited assets become part of the estate of the surviving spouse, and unless the combined value is less than the exempt amount, estate tax could be due at the death of that spouse.

The difference, with a QDOT, is that at the death of the surviving, noncitizen spouse, the assets in the trust don't become part of his or her estate, but are taxed as if they were still part of the estate of the first spouse to die. Income distributions from the trust are subject to income tax alone, but distributions of principal may be subject to estate tax.

References in periodicals archive ?
4) Amounts paid to reimburse the surviving spouse for any item of income imposed on the spouse to which the spouse is not entitled under the terms of the QDOT.
Assets in a QDOT are deferred from estate taxation until distribution (other than under the income, hardship, or certain miscellaneous distributions exemptions) or the death of the surviving spouse.
The trustee of the QDOT is personally liable for the QDOT tax if it is not paid out of the QDOT property.
If the assets of a QDOT are in excess of $2 million (determined without regard to any indebtedness), the QDOT must meet one of the following additional requirements at all times during the term of the QDOT:
12] The above additional requirements also can apply to a QDOT having $2 million or less if more than 35 percent of the QDOT consists of real property located outside the United States.
For purposes of determining the $2 million threshold, the personal representative may exclude up to $600,000 in value attributable to real property (and related furnishings) owned directly by the QDOT used by the surviving spouse as a personal or second residence.
Property passing to a noncitizen spouse either outright or in a nonqualifying trust does not have to be subject to the QDOT estate tax.
Thus, the only nontaxable distributions the QDOT could make would be limited to distributions of the income and the miscellaneous other distributions previously mentioned.
In the case of a noncitizen who is a citizen of another country with which the United States has a tax treaty with respect to estate, inheritance, or gift taxes, the QDOT rules do not apply to the extent they are inconsistent with the provisions of such treaty relating to estate, inheritance, or gift tax marital deductions.
A qualified heir may avoid such recapture by placing the qualified family-owned business assets into a trust meeting requirements similar to a QDOT (or through certain other security arrangements).
One interesting approach when planning for a noncitizen spouse is to combine a QDOT with a charitable remainder trust (CRT).