How a QDOT is used for Cross-Border Estate Planning

How a QDOT is used for Cross-Border Estate Planning

A Qualified Domestic Trust is a specific type of trust that assists taxpayers who may become subject to estate tax involving a deceased spouse in which, due to the US tax status of the recipient beneficiary –– the surviving spouse would not be able to claim the unlimited marital deduction as a US Citizen Spouse or full exclusion amount as they would if they were a US Citizen or Lawful Permanent Resident (the latter in situations in which a decedent is a non-US person with US property and the spouse is neither a Citizen or Resident of the US). There are some potential costs and fees pitfalls regarding large QDOT trusts — and therefore taxpayers who are considering a QDOT for cross-border estate tax planning and minimization must consider the requirements for creating and managing a trust. Let’s go through 5 key facts about Cross-Border Estate Planning.

Become a US Citizen and Unlimited Transfer Tax Exclusion

When one spouse transfers wealth to a US Citizen spouse, there is an unlimited exclusion available. The key fact is that the recipient spouse –– not necessarily the transferor spouse — has to be a US Citizen. Oftentimes, it was not until after the first spouse passes that the surviving spouse who is a non-US Citizen realizes that they will not enjoy the benefit of the unlimited marital deduction because they are not a US citizen — and they first learn of the QDOT.

QDOT Can be Created After Death

One nice benefit of the QDOT can be created after the death of the first spouse. Therefore, if a person who is a non-US citizen  (subject to time constraints) becomes a US Person, they may avoid estate tax at the current time.

There are Specific Requirements for Post-Death QDOT

In order to qualify for the QDOT, there are certain requirements that the person must meet. If the person does not need the specific requirements necessary to complete a post-death QDOT trust, then the trust may be deemed invalid.

Plus/Minus Two-Million Dollars

If the QDOT is considered a large QDOT in that the property being transferred into the QDOT exceeds $2 Million, then there are more specific requirements to completing the QDOT. For example, one of the trustees of the QDOT must be considered a US Bank — and a bond must be posted with the IRS based on the value of the property that is transferred into the trust.

Taxes will be Paid

By creating a QDOT, it is not as if all taxes will be avoided forever. There are taxes that will become due based on distributions being made from the trust –– along with estate taxes when the second spouse passes away – which is generally the catalyst to require an estate tax on the value of the QDOT.

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