Your estate plan should be custom crafted to suit your needs. Every family is different, and there is an ideal solution for every situation.
With this in mind, let’s look at the estate planning device called a QDOT trust.
The acronym QDOT stands for a qualified domestic trust. This type of trust would be useful for a high net worth individual who is married to someone who is not an American citizen.
Federal Estate Tax Parameters
To understand the value of a QDOT trust you must know some things about the federal estate tax. In 2014, the amount of the federal estate tax exclusion is $5.34 million. This is the amount that you can transfer free of the estate tax.
There is an unlimited marital estate tax deduction. You do not have to use any of your $5.34 million exclusion to leave a tax-free bequest to your spouse, if your spouse is an American citizen.
Why is this deduction only available to American citizens? If you use the unlimited marital deduction to leave a tax-free inheritance to your spouse, what happens next? Your spouse would be in possession of a taxable estate. The Internal Revenue Service would eventually have an opportunity to seek its share.
Let’s say that the unlimited marital deduction was in fact available to a non-citizen spouse. This person could simply return to his or her country of citizenship with a tax-free inheritance. The American Internal Revenue Service would have no recourse.
This is why the unlimited marital estate tax deduction is only available to American citizens.
Now that we have provided the necessary background information, we can look at QDOT trusts. With this type of trust you would name your non-citizen spouse as the beneficiary. If you do indeed predecease your spouse, your surviving spouse could draw from income that is earned by the QDOT trust.
Distributions of earnings that are received by the surviving spouse would be looked upon as regular income by the Internal Revenue Service. However, the estate tax would not be levied while your spouse is still living. As a result, the earnings of the trust would be derived from the earning power of the entirety of your estate.
It should be noted that the beneficiary can potentially draw from the principal at the discretion of the trustee that you appoint when you create the trust. These distributions would be subject to the federal estate tax.
Indianapolis Wealth Preservation Consultation
If you are exposed to the federal estate tax, you must take steps to preserve your wealth. Our firm offers free Indianapolis wealth preservation consultations to people in the greater Indianapolis area. You can request an appointment through the contact page on this website or call us directly at (317) 684-1100.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.