Estate Planning Newsletter

• The Convention on the Form of International Wills
  The Convention on the Form of an International Will (the “Convention”) was drafted and presented to the international community in 1973. The Convention was signed and ratified by a number of countries, including Canada and... Read more.
• New Estate Tax Rates Bring Certainty
  Much to the relief of many, the American Taxpayer Relief Act of 2012 (“2012 Tax Act”) was enacted in the beginning of 2013, making permanent many of the tax benefits that were scheduled to expire at the end of 2012. The... Read more.
• Reverse Mortgages as a Way to Enhance Retirement Living
  Many are familiar with the concept of a mortgage, where an individual makes monthly payments to a lender. However, for those who qualify, there is another type of mortgage called a “reverse mortgage” (RM), where the lender... Read more.
• Tax Treatment of Contaminated Property
  The Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) imposes liability for the investigation and cleanup of contaminated real property without regard to whether the landowner created or allowed the... Read more.

• Aretha Franklin’s estate remains at heart of family dispute
• How Do Investments In Opportunity Zones Fit Into Estate Planning?
• If Your Estate Plan Includes IRAs, a New Law Means It Is Time to Reevaluate
• Estate Planning Tips To Prepare For 2020
• New retirement law affects IRAs, estate planning

Non-Citizen Spouses and the Qualified Domestic Trust (QDOT)

A QDOT is a specific type of marital deduction trust that is designed to ensure that non-citizen spouses will eventually pay any taxes that may be due upon distribution of the principal from the trust, even if the surviving spouse resides outside of the United States. Without a QDOT, an estate would be immediately taxable. More specifically, the marital deduction typically allows the assets of an estate to be passed to a spouse without tax consequences.

The marital deduction for property passing to a non-citizen spouse is generally not allowed without the existence of a Qualified Domestic Trust (QDOT).

Special Requirements

To ensure the taxes are eventually paid, there are certain required provisions:

• The trustee of the trust, or one of the co-trustees, must be a U.S. citizen or a domestic corporation of the U.S.
• The trust must contain a restriction that no principal will be distributed from the trust unless the U.S. citizen or domestic corporation trustee has the right to withhold any tax due from the distribution.
• The trust must comply with Treasury Regulations to ensure the collection of any tax.
• The trust must satisfy the applicable rules for marital trusts for U.S. citizen surviving spouses.
• A QDOT election must be made on the decedent’s estate tax return.

If a trust fails to qualify as a QDOT, under certain circumstances a QDOT can be created by the use of a reformation (correction or change of an existing trust document). Some foreign countries prohibit trusts or prohibit a trust from having a U.S. trustee. In recognition of these situations, the Secretary of the Treasury has the authority to prescribe regulations allowing exceptions to the above requirements for qualifying as a QDOT. However, such regulations may only allow a marital deduction for nontrust arrangements or for trusts without a U.S. trustee under circumstances where the U.S. would retain jurisdiction and where there is adequate security to impose a tax on transfers by the surviving spouse of the property transferred by the deceased spouse.

Estates of $2 Million or Less

For estates of $2 million or less, the trust must either require that real property located outside of the U.S. accounts for no more than 35% of the fair market value of the trust property or meet the requirements for an estate that exceeds $2 million in assets.

Estates Exceeding $2 Million

For estates that exceed $2 million in assets, the QDOT must provide one of the following:

• Require that at least one trustee is a U.S. bank
• Post a surety bond in favor of the Internal Revenue Service (IRS) in an amount equal to 65% of the fair market value of the trust assets
• Provide a letter of credit from a domestic bank or U.S. branch of a foreign bank, or issued by a foreign bank and confirmed by a domestic bank, in an amount equal to 65% of the fair market value of the trust assets

QDOT Property May be Subject to Estate Tax if:

• Any principal distributions (except distributions made on account of hardship) to the surviving spouse will be subject to estate tax
• The surviving spouse’s death prior to December 31, 2009 will cause the remaining property in the QDOT to be subject to estate tax as if it were included in the estate of the first spouse to die
• If the QDOT ceases to meet the requirements under the regulations, an estate tax is imposed as if the surviving spouse had died on the date when the trust failed to qualify as a QDOT

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