What Is a Qualified Domestic Trust (QDOT)?
A Qualified Domestic Trust (QDOT) is a trust used to hold assets for the benefit of a non-U.S. citizen spouse. The trust is designed to help couples who are not citizens of the United States keep their assets after the death of one spouse.
For the QDOT to be valid, the trust must meet certain requirements. The trust must be irrevocable, and the trustee must be a U.S. citizen or resident alien.
The trust must also have a provision that states that upon the first spouse's death, the assets in the trust will not be distributed to the surviving spouse until he or she becomes a U.S. citizen or resident alien.
If the trustee is not a U.S. citizen or resident alien, the trustee must be a bank or other financial institution authorized to do business in the United States.
The QDOT can hold any type of asset, including real estate, stocks, bonds, and cash.
How to Create a QDOT
There are a few different ways that you can create a QDOT. One way is to create the trust yourself.
Another way is to work with an experienced attorney who can help you create the trust and ensure that it meets all requirements.
If you are working with an attorney, he or she will likely have a QDOT template that can be used to create the trust.
Once the trust is created, you will need to fund it. This means you will need to transfer ownership of any assets you want to include in the trust into the name of the trust.
For example, if you own a piece of real estate that you want to include in the trust, you will need to transfer the deed into the name of the trust.
The same is true for stocks, bonds, and other assets. Once the assets are in the name of the trust, they can be managed by the trustee on behalf of the beneficiaries.
How Does a QDOT Benefit the Surviving Spouse?
One of the main benefits of a QDOT is that it can help the surviving spouse avoid paying estate taxes on the assets in the trust.
Under current law, a non-U.S. citizen spouse is only entitled to a $60,000 exemption from estate taxes.
This means that any assets above $60,000 are subject to estate taxes.
With a QDOT, the assets in the trust are not included in the estate of the first spouse to die.
This means that the surviving spouse can keep all the assets in the trust without paying estate taxes on them.
Another benefit of a QDOT is that it can help protect the trust assets from creditors.
If the surviving spouse owes money to creditors, they may try to seize the assets in his or her estate to satisfy the debt.
However, because the assets in a QDOT are held in trust, they are not considered part of the surviving spouse's estate and are protected from creditors.
A QDOT can also help to ensure that the assets in the trust are distributed according to the wishes of the first spouse to die.
If there is no QDOT, the assets in the estate would be distributed according to the laws of intestate succession.
This means the assets would be distributed to the surviving spouse's closest relatives, which may not be what the first spouse to die wanted.
With a QDOT, the assets in the trust can be distributed according to the terms of the trust, which means that they can go to whomever the first spouse to die wants them to go to.
Limitations of a QDOT
There are a few limitations to consider if you are considering a QDOT.
First, a QDOT can only be used if the first spouse to die is survived by a spouse who is not a U.S. citizen or resident alien.
If the surviving spouse is a U.S. citizen or resident alien, a QDOT is unnecessary, and the estate's assets can be distributed without one.
Second, a QDOT must have a provision that states that the assets in the trust will not be distributed to the surviving spouse until he or she becomes a U.S. citizen or resident alien.
This means that if the surviving spouse remarries before becoming a U.S. citizen or resident alien, the assets in the trust will not be available to him or her.
Third, a QDOT must have a provision that states that the assets in the trust will be distributed to the surviving spouse's estate when he or she dies.
This means that the trust beneficiaries cannot inherit the assets directly.
Fourth, a QDOT must have a provision that states that the trustee can distribute distributions from the trust for the health, education, maintenance, and support of the surviving spouse.
This means that the trustee can use the assets in the trust to pay for things like medical bills, food, and shelter for the surviving spouse.
Finally, a QDOT must be properly funded to avoid estate taxes on the assets in the trust.
This means you will need to transfer ownership of any assets you want to include in the trust into the trustee's name before the first spouse dies.
If you fail to do this, the assets will be subject to estate taxes.
Portability and QDOT
Under the Tax Cuts and Jobs Act of 2017, the estate tax exemption is doubled for individuals who die after December 31, 2017.
In 2023, the exemption is $12.92 million for individuals and $25.84 million for couples.
When the first spouse in a couple dies, the unused portion of his or her exemption can be transferred to the surviving spouse.
This is called "portability."
For example, let's say that the Husband and Wife are married and each have estate worth $10 million.
The husband dies and leaves all of his assets to his Wife. His wife now has an estate worth $20 million.
Because the exemption is doubled for couples, the Wife can use the Husband's unused portion of the exemption, which is $12.92 million.
This means that the Wife's estate will not owe any estate taxes.
However, portability only applies to the estate tax exemption.
It does not apply to the generation-skipping transfer tax exemption.
If you want to take advantage of the increased exemption for the generation-skipping transfer tax, you will need to use a QDOT.
A QDOT can be used to shelter assets from both estate taxes and generation-skipping transfer taxes.
The Bottom Line
A QDOT is a trust that can be used to shelter assets from estate taxes.
A QDOT must have a provision that states that the assets in the trust will not be distributed to the surviving spouse until he or she becomes a U.S. citizen or resident alien.
A QDOT must also have a provision that states that the assets in the trust will be distributed to the surviving spouse's estate when he or she dies.
A QDOT must be properly funded to avoid estate taxes on the assets in the trust.
FAQs
1. Who needs a QDOT?
A QDOT is necessary when the surviving spouse of a deceased person who was not a U.S. citizen or resident alien is also not a U.S. citizen or resident alien.
2. What are the requirements for a QDOT?
A QDOT must have a provision that states that the assets in the trust will not be distributed to the surviving spouse until he or she becomes a U.S. citizen or resident alien.
A QDOT must also have a provision that states that the assets in the trust will be distributed to the surviving spouse's estate when he or she dies.
A QDOT must be properly funded to avoid estate taxes on the assets in the trust.
3. How is a QDOT different from a regular trust?
A regular trust does not have the same requirements as a QDOT. It also does not provide the same tax benefits.
4. How do I fund a QDOT?
You will need to transfer ownership of any assets you want to include in the trust into the trustee's name before the first spouse dies.
If you fail to do this, the assets will be subject to estate taxes.
5. What is portability?
Portability is the ability to transfer the unused portion of a deceased spouse's estate tax exemption to the surviving spouse.
