My Little QDOT

Despite the depressing divorce statistics in America, married life is still a respected and fundamental institution of our society. Marriage even receives favorable treatment under the tax code after death. Generally, an estate may claim an unlimited deduction for the value of all property that passes from a decedent to the surviving spouse upon death. So, a basic "I love you" will, where all property is left to the spouse outright upon death, allows the estate to pay no tax.

However, there is no marital deduction allowed for the estate of a U.S. resident who leaves property outright to a surviving spouse who is not an American citizen. Congress has provided a couple of ways for deceased Americans to transfer property to their alien spouses. One such way includes using up their unified credit. If the decedent was a U.S. citizen or resident, the estate can still qualify for the unified credit exemption equivalent ($675,000 in 2001) allowing up to this amount to be passed tax-free even to a non-U.S. citizen spouse.

Congress has also provided Internal Revenue Code Section 2056A that allows a marital deduction for property placed into a special trust for the benefit of the non-citizen spouse called the Qualified Domestic Trust (QDOT). The IRS section does require that there are safeguards to ensure that the trust property (if not used up by the alien survivor) is eventually subjected to the U.S. estate tax.

A QDOT must have at least one U.S. citizen as a trustee. After all, we have to have a trustworthy American around to look out for U.S. interests. An irrevocable election to claim the marital deduction must be made on the decedent spouse's estate tax return. If the election is made, property in the QDOT will not be taxed until distributed from the trust or upon the survivor's death. The surviving spouse must receive the yearly income from the trust and will be taxed at that time. This trusty trustee must be authorized to withhold necessary estate or gift taxes on distributions and the required estate tax upon the survivor's death.

Some special provisions do exist. Distributions of trust income are not subject to estate or gift tax. Emergency or hardship distributions are possible and are exempt from transfer tax. QDOTs can sometimes be created even after the first spouse dies. And it is occasionally possible for the alien spouse to become a U.S. citizen shortly after the first spouse's death and take advantage of the unlimited marital deduction.

QDOTs can be useful estate planning tools for married couples where one of the partners prefers to keep his/her alien citizenship. Of course, this brief article is no substitute for a careful consideration of all the advantages and disadvantages of this matter in light of unique personal circumstances. Before implementing any significant tax or financial planning strategy, contact a financial planner, attorney or tax advisor as appropriate.