Non-USA Citizens - Qualified Domestic Trust (QDOT)
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This trust is used if one or both of the spouses are not United Sates citizens.
There is no limit on the size of assets that you as a citizen of this country can transfer to your spouse while alive or upon your passing (unlimited marital deduction).
Prior to QDOT coming into existence, a non citizen survivor spouse could take all of the assets received through unlimited marital deduction, leave the country and not pay a penny of estate tax.
Estate tax, for U.S. citizens, on the amount beyond the estate tax exemption (presently at $1,500,000) is not due until the survivor disposes of the property or at the survivor’s death. The non citizens are not so fortunate. They may receive only the amount up to the exemption in effect at the time. This can also be further reduced by any gifts received up to then (not unlimited as for the citizens, but rather limited to $100,000 per spouse). In other words, the estate tax is due on any amount above the exemption at the time of the first death, or, to put it more bluntly, you may have to sell some or all of the assets to pay the tax due.
The QDOT trust solves this problem and assures that you will pay taxes due. The amount that can pass to the survivor spouse at the time of the first death is unlimited if the property is placed in QDOT trust first for the benefit of the surviving spouse. For the unlimited marital deduction to be applicable, the property must REMAIN in the trust. The surviving spouse receives the income from the trust free of any estate tax. Any distributions of the tax principle will be subject to the estate tax in the estate of the deceased spouse unless a “hardship” exception applies. For this exception to apply, the principal funds must be used to meet an immediate and substantial financial need relating to the survivor spouse’s health, education, or support or the needs of a child or other person whom the survivor spouse is LEGALLY obligated to support. At the time of the death of the survivor spouse the trust terminates and the estate taxes are calculated as it they were a part of the taxable estate of the first spouse.
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