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 ?
This would diminish the need to fund a QDOT in order to provide support for the surviving noncitizen spouse.
3) When the QDOT fails to meet any QDOT requirement designed to assure that the IRS will collect the estate tax.
citizen, then no tax is imposed on any distribution from a QDOT if the surviving spouse was a resident of the United States between the date of the decedent's death and the date of citizenship and either no tax was imposed, or, if a tax was imposed on any transfer, the surviving spouse elects to treat any distribution on which tax was imposed as a taxable gift, and to treat any reduction in tax as a credit under Sec.
By utilizing the QDOT to collect and hold the insurance proceeds, the client can defer payment of the estate tax that would otherwise have been paid.
An estate tax is imposed on any distribution from the QDOT made before the death of the surviving spouse, as well as on the value of the property remaining in the QDOT on the date of death of the surviving spouse.
Three basic requirements which must be met by a trust in order to qualify as a QDOT are as follows:
The executor of the decedent's estate must make an election on the Federal estate tax return to qualify the trust as a QDOT.
As delineated in PLR 9623063, as income is earned inside the IRA, any amounts distributed would be considered income to the QDOT for purposes of IRC section 2056A(b)(3)(A) and income not distributed would be added to principal.
In addition to tax deferral, however, a QDOT may also result in absolute savings.
The same result can be achieved with a QDOT as with a QTIP regarding an IRA account.
The IRS ruled m the affirmative in Letter Ruling 9623063,(58) in which the surviving spouse, who was the primary beneificiary of the decedent's IRAs, timely rolled over the decedent's interest in the IRA to her own IRA, and irrevocably entered into a QDOT agreement with respect to her IRA.
2056A(b)(1), a QDOT secures the payment of the estate tax by taxing any distribution from the trust before the surviving spouses death and taxing the trust property remaining at that spouse's death.