Structuring QDOTs for Non-Citizen and Nonresident Spouses: Deferring Tax Through Qualified Domestic Trusts

The permanent increase in the estate tax exclusion amounts for U.S. taxpayers has changed the focus for most estate planners from estate tax avoidance to income and gift tax minimization. However, for U.S. taxpayers (or NRA taxpayers with U.S. property) who have non-citizen spouses, estate tax planning remains a critical challenge. Estate planners and advisers to families with non-U.S. spouses must meet these challenges to avoid ruinous tax consequences. For these taxpayers, a Qualified Domestic Trust (QDOT) is often the only means of passing assets tax-free to non-citizen spouses.

In contrast to the high exclusion amount for citizens ($5,450,000 for individuals and $10,900,000 for a married couple), non-resident/non-citizens with U.S.-based property are only entitled to an estate tax credit equivalent to a $60,000 estate exclusion, unless a tax treaty grants a higher amount. Additionally, non-U.S. surviving spouses are generally not entitled to the unused portion of the deceased U.S. spouses unused exemption amount, eliminating the benefits of “portability.”

There are various ways to structure a QDOT to benefit a non-citizen spouse. For a trust to qualify as a QDOT, the trust document must contain specific provisions addressing trustee requirements and withholding remittances on distributions to the non-citizen spouse, among other issues. Estate planning counsel must understand components that must be part of a trust operating agreement for the trust to qualify as a QDOT.

Listen as our experienced panel provides a thorough and practical guide to QDOT strategies and structures, including sample language for critical provisions.

1. Estate tax exemptions for nonresidents
2. Terms of QDOTs
3. Withholding and trustee provisions
4. Benefits and risks of QDOTs
5. Key structuring examples

The panel will review these and other key issues:

• What types of trusts qualify as QDOTs?
• Structuring withholding provisions that will meet IRS requirements for QDOT designation
• What specific trustee provisions and designations must a QDOT document contain to withstand IRS scrutiny?
• Tax consequences and inclusions on death of U.S. spouse under various QDOT structures

Learning Objectives

After completing this course, you will be able to:

• Identify provisions and drafting language that qualify for QDOT treatment
• Decide whether a QDOT is appropriate for U.S. clients (or NRA clients with U.S. property) who have nonresident spouses and decide which type of trust structure is optimal
• Recognize special provisions for trustees
• Determine how to structure asset distributions and dispositions to comply with withholding provisions
• Discern income and transfer tax consequences of QDOT structures upon death of U.S. or NRA spouse, utilization of DSUE, and distribution of assets to surviving non-citizen spouse

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, drafting wills and trust documents, supervising other attorneys or estate planners. Specific knowledge of concepts regarding taxation of non-U.S. taxpayers on U.S. assets and income, portability rules and spousal exemption rules; familiarity with tax treaty provisions.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).