The unlimited marital deduction allows a person to transfer any amount of funds to a spouse free from tax. However, if your spouse is not a U.S. citizen, your estate cannot use this marital deduction without a Qualified Domestic Trust (QDOT). QDOTs were designed to stop noncitizen surviving spouses from leaving the country with a deceased spouse’s money without paying U.S. estate taxes on it.
A QDOT holds the funds for your spouse’s benefit, allowing your surviving noncitizen spouse to use the income and the principal needed without a large portion of it going to the IRS after your death. If it is properly established and administered, estate taxes are paid only after your spouse passes away.
A QDOT is not required for New York state residents whose estates are valued at more than $1 million but less than the federal estate tax exclusion amount ($5,250,000 in 2013, $5,340,000 in 2014).
How does a QDOT work?
A QDOT works by placing all of your assets that exceed the federal estate tax exclusion amount into a trust. The trust owns the property, and your spouse can withdraw the income from those funds. The trustee of the QDOT has the discretion whether to distribute principal from the trust to your spouse.
Taxes are not paid on QDOT income distributed to the spouse, nor on principal amounts withdrawn from the trust in the event of financial hardship, which is defined by the IRS as an “immediate and heavy financial need” of the surviving spouse. Any distributions of principal that do not meet this definition and any funds remaining in the QDOT after your spouse dies are taxed at your highest estate tax rate.
At least one trustee of the QDOT must be a U.S. citizen or a domestic corporation such as a bank or trust company. If your spouse decides to return to the country in which the person was born, administration of the trust may be moved to that country only if the laws there authorize trusts of this nature and the trust terms can be satisfied.
Consult with a Staten Island qualified domestic trust attorney at Armstrong & Lamberti, PLLC to evaluate your options and determine the method that works best for you and your family.