San Gabriel Valley Tax and Business Services Estate Planning Center Information Release

QUALIFIED DOMESTIC TRUST

Having a Qualified Domestic Trust (QDT or QDOT) is the only way an estate will be allowed to use the marital deduction if the surviving spouse is not a U.S. citizen. That's because Uncle Sam doesn't want non-citizen spouses to inherit sizeable estates and then return to their homelands without paying any estate taxes.

Remember, the marital deduction lets decedents leave to their spouse an unlimited amount of assets with no estate taxes at death. Uncle Sam plans to collect the taxes when the surviving spouse dies. But if the spouse is not a citizen and leaves the country with the assets Uncle Sam is left empty handed. So, in 1988, Congress decided to eliminate the unlimited marital deduction for non-citizen spouses.

This means that, when a person with a non-citizen spouse dies, everything in the decedent's estate over the federal estate tax exemption will be taxed - unless planning for the estate includes a QDOT.

The QDOT works a little like the C Trust in a Living Trust.  The assets that are transferred to the QDOT (probably all of the grantor’s assets over the amount of the federal estate tax exemption) are not taxed upon first death.  This means that the entire estate is available to provide for the surviving spouse. The trust (not the spouse) owns the assets, but the spouse can receive income from it; with the trustee's approval the spouse may also receive principal.

To make sure estate taxes are paid when the spouse dies, at least one trustee of the QDOT must be a U.S. citizen or U.S. corporation. (Sometimes a surviving spouse wants to return to his/her homeland and finds it would be easier to have the trust administered there. But some countries do not authorize trusts or allow trusts to have U.S. trustees. For these situations, Congress recently passed legislation that will allow the requirement for a U.S. trustee to be waived and will allow a similar legal arrangement to be used instead of a trust.)

The income the surviving spouse receives from the QDOT is taxed as ordinary income in the year it is received. But any principal the surviving spouse receives (unless the distribution is due to "hardship" as defined by the IRS), plus assets remaining in the QDOT when the surviving spouse dies, will be taxed as if they were part of the decedent's estate when the decedent died (at the decedent's highest estate tax rate).

Without a QDOT, these estate taxes would have to be paid at the time of the decedent's death -- first death of two spouses. But with a QDOT (just like a C Trust), the taxes are delayed until the surviving spouse dies. This means that more is available to provide for the surviving spouse.

Of course, if the non-citizen spouse becomes a U.S. citizen before the assets are transferred to the QDOT (i.e., before the citizen spouse's death), there is no need for a QDOT.

 The above article is based in large part upon material supplied by:

with editorial revisions by Arthur W. Landing, EA, an officer of the parent company of San Gabriel Valley Tax and Business Services.

Full disclosure: San Gabriel Valley Tax and Business Services (and its predecessors) have for nearly 20 years cooperated with Mr. Klein's office in the preparation of living trusts and related documents.  We have also joined in the presentation of periodic joint informational seminars.  We receive remuneration from and share in expenses relative to these activities with Mr. Klein's office. Further information relative to the respective offices includes the following:

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        Leslie Klein, Esq                             Arthur W. Landing, EA
        Les Klein & Associates                      San Gabriel Valley Tax

        3rd Floor                                                  and Business Services
        14245 Ventura Blvd.                          4864 Walnut Grove

Sherman Oaks, California 91423       Rosemead, CA 91770

        Tel: 1-800-KLEINLAW                       Tel: 1-626-292-6550

        Fax: 1-818-501-2859                          Fax:1-626-626-292-6534

        E-Mail: kleinlaw@earthlink.net           Email: art@sgvtax.com
        Website: http://www.kleinlegal.com    Website: http://sgvfin.com

The information in the above article is designed to provide a general overview with regard to the subject matter covered and is not, unless otherwise specifically referenced, state specific. The authors, publisher and host are not providing legal, accounting, or specific advice to any individual situation.

Last revised 07/01/05