Living Trusts for Non-Citizens
Qualified Domestic Trust (QDT)
The advantages of having a Living Trust are outlined in our
article on this web site, Wills and Trusts which
the reader should review before reading this article. Living Trusts can save probate fees,
can allow non public transfer of assets after death, and can save
executor’s fees. In a typical million dollar estate, the savings
can be in the tens of thousands of dollars.
For a married couple, a massive tax savings is achieved if the
marital deduction is utilized completely. Recall that anything going to a
spouse is estate tax free until the second spouse to die finally dies.
But to qualify for that marital deduction the gift must be outright to
This can be a problem for many people who want to make sure that
whatever their spouse does not use during his or her life is made
available for the children. As one client put it, “If my husband
marries Sophia Loren after I die, I don’t want her getting all my
money, I want it to go to my children!”
The only way to do that is to use a trust in which the spouse gets
all the income during his or her life, and perhaps the right to invade
corpus (principle) if there is real need, and upon the spouse’s
death the remainder goes to the children. But the problem with that plan
is that the estate tax authority held that the gift to the spouse, to
qualify for the marital deduction, must be outright, not in trust.
Congress solved that problem by allowing a special trust…a
QTIP trust…to be created. (QTIP stands for “qualified
terminable interest trust”). A QTIP provides that the spouse MUST
receive all the income, at least quarterly, for the spouse’s life
and may or may not allow invasion of corpus…and still qualified for
the martial deduction. QTIP trusts are used in the majority of estate
But a problem remained: non citizens were not allowed to use QTIPS
even though they lived in the United States or owned property here.
The solution? The QDT or “QDOT” Trust, explained
LIVING TRUSTS FOR NON-CITIZENS
Purpose: The purpose of a Qualified Domestic Trust (known as a QDT
or QDOT) is to preserve the
marital deduction when the surviving spouse is not a United States citizen and whose assets are likely to be
subject to the federal estate tax
if the marital deduction is not available. The marital deduction allows transfers
of unlimited amounts of assets between spouses at death. The result is that the surviving spouse
does not have to pay any tax on the estate of the first spouse to die, provided
the surviving spouse is a citizen of the United
Note that the marital deduction only postpones the federal estate
tax on the estate, and, in some cases, may cost a couple additional taxes
if there are no other provisions to reduce estate taxes. Such tools are discussed in the
articles on Wills and Trusts,
But while the marital deduction is only a postponement of taxes,
that postponement can be for decades and given the uncertainty of the estate
tax as a law, may act to practically eliminate the taxes forever. Clearly
anyone who can should take full advantage of that particular tool.
No marital deduction is allowed if the surviving spouse is not a U.S. citizen and does not become a citizen by the
time that the estate tax return is filed.
Thus, an estate of, for instance, one million dollars which would
have no estate tax whatsoever if the surviving spouse was a citizen would
easily have three hundred thousand dollars in tax if the surviving spouse
was a non citizen…due nine months from date of death!
However, the marital deduction can be still be used if the assets
are transferred to a Qualified
Domestic Trust (QDT). This is
important for estates that exceed the applicable exclusion amount ($1.5
million during 2004), because the marital deduction is often used to postpone
or avoid estate taxes for estates that are larger than $1.5 million. Without the marital deduction, larger
estates of non-U.S. citizens will have to pay taxes that estates of U.S. citizens would not have to pay until the
surviving spouse died.
REQUIREMENTS FOR QDT
To qualify as a QDT, a trust must meet the following requirements:
1. At least one trustee must be a U.S. citizen or a U.S. corporation.
2. No distribution can be made from the
trust, except for income, unless the trustee who is the U.S. citizen or corporation has the right to
withhold estate taxes from the distribution.
3. The trust must meet
Treasury regulations regarding the collection of any tax.
4. The executor must
elect on the estate tax return to treat the trust as a QDT.
After the death of the surviving spouse, the assets in the QDT are
subject to the estate tax as though they were included in the estate of
the first spouse to die. These
assets are not included in the surviving spouse's estate.
It has been written that the most important tax
advantage made available to couples is the marital deduction and, indeed,
when civil unions are discussed one of the first issues brought up is the
inability of gay couples to obtain the marital deduction with resultant
massive additional taxation. The same danger applies to non citizens but
obtaining good legal advice and the correct trust instrument can ensure this
valuable tool is made available. Key provisions must be incorporated into
the instrument and, of course, if citizenship is later obtained the Trust
should be altered, if the Settlor wishes, to conform more closely with
the standard QTIP Trust.