A qualified domestic trust (QDOT) is similar to a QTIP trust in that both trusts allow a taxpayer who survives a spouse that recently passed away to take a marital deduction on estate taxes. Another similarity between these two trusts is that they only allow the assets that are transferred into the trust to qualify for the marital deduction. However, the one difference between the trusts is that the qualified domestic trust allows a spouse, even if they are not a U.S. citizen, to receive this marital deduction.
Why To Use a QDOT
In most cases, someone who is not a U.S. citizen yet is married to a U.S citizen will not be able to utilize the marital estate tax deduction when their spouse passes away. Thus, the main reason why someone would use a qualified domestic trust is so that when they pass away, their assets would transfer into the trust so that their spouse can utilize the assets tax-free. This is true no matter how much the assets are worth. However, as with any other trust, it is vital that the grantor of the trust complies with all requirements and regulations so that the trust is not invalidated upon their death. One important note is that only the assets the grantor transfers into the QDOT are eligible for the marital deduction.
How Does a QDOT Work
In most cases, when someone dies, their spouse will inherit all of their assets. This is not a problem for married couples that both have U.S. citizenship. However, if one spouse is not a U.S. citizen, they are not eligible for the marital tax deduction. Thus, one will transfer all of their assets that they want to go to their spouse into a QDOT. Once in the QDOT, the trust will own the assets instead of the surviving spouse.
While the spouse does not technically own any of the assets in the trust, they have access to these assets and still benefit from interest accruing in a bank and other financial accounts. While the surviving spouse is entitled to and does not have to pay estate tax on any income that the assets within the trust make, they do have to pay tax when they withdrawal this income from the trust itself.
Finally, when the surviving spouse passes away, the remaining assets go to the couple’s children, friends, or charity. However, when the assets transfer to these individuals, the estate tax applies.
Can One Establish a QDOT After Death
While it is possible to create a QDOT after one spouse passes away, there are limits on this postmortem trust. Additionally, there are strict time constraints that apply to a QDOT after a spouse has already passed away. Finally, because of these limits, a postmortem QDOT will likely not even be the best estate planning option available.
Limitations of a QDOT
A QDOT is a great option for those who have a spouse without U.S. citizenship. However, there are a few drawbacks to utilizing this type of trust. The largest downside of a QDOT is that when the surviving spouse passes away and the assets in the trust transfer to beneficiaries, the assets are not exempt from the estate tax. Thus, when utilizing a qualified domestic trust, understand that after both spouses pass away, the asset value of the trust could be significantly reduced.
Final Thoughts
Trust and estate laws are complex. This is so no matter the type of trust you decide to establish. As such, it is extremely important to have legal representation that can help you correctly set up your trust. The Antonoplos & Associates trust and estate lawyers have over 20 years of experience helping clients in DC, Maryland, and Virginia set up qualified domestic trusts. With this knowledge and experience, we can help with any legal issues that occur from setting up your trust.
Furthermore, Peter Antonoplos, founder and managing partner of Antonoplos & Associates has an LLM in Taxation from Georgetown University Law Center. With this knowledge, Peter can help you effectively set up your trust to maximize the tax savings you receive from setting up this account in DC, Maryland, and Virginia.
Contact our DC Law Office for More Information
Finally, for more information regarding what is a qualified domestic trust, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding trust and estate law, check out our blog.