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Qualified Domestic Trust

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Manhattan CPA Firm | Miller & Company LLP > Qualified Domestic Trust

Qualified Domestic Trust

If you, a U.S. citizen, marry a non-citizen, the federal government taxes your estate as soon as you pass, leaving your spouse with a lot less to live on. One of the ways to provide for your non-citizen spouse is to set up a qualified domestic trust or QDOT instead of a regular trust.

When the time comes to write your will, you have the right and the ability, as a U.S. citizen, to leave your spouse your entire estate upon your death. If your estate is worth more than a certain amount, you can leave your assets in a trust, where they won’t be taxed, at least not until your spouse passes. With your assets in a trust, your spouse is entitled to any income the trust generates, typically interest payments.

Interest payments from the trust to your spouse are dispersed on a regular basis, usually annually. These payments are taxed as income. Miller & Company LLP, NY Certified Public Accountants, a best rated NYC CPA firm.

Most forward-thinking CPAs recommend that your spouse also have access to the assets in your trust. If any assets are withdrawn, though, they’re subject to estate taxes. Your personal accountant can explain the details of the law to you.

What Is a Qualified Domestic Trust?

If you, a U.S. citizen, marry a non-citizen, the federal government taxes your estate as soon as you pass, leaving your spouse with a lot less to live on. One of the ways to provide for your non-citizen spouse is to set up a qualified domestic trust or QDOT instead of a regular trust.

What the government is trying to prevent by taxing your estate right away is your non-citizen spouse taking the money from the trust out of the country without paying taxes on it. A QDOT is a trust that:

  • Changes the timing on how your estate gets taxed
  • Treats your non-citizen spouse more like a citizen
  • Lets the estate allow unlimited marital deductions

QDOT Requirements

Federal estate taxes are applied to normal estates worth more than $5.45 million. While the $5.45 million is exempt from federal estate taxes, any amount beyond that figure is subject to a 40 percent tax. The money that’s exempted is normally protected by the unlimited marital deduction, which allows you to leave an unlimited amount of your assets to your spouse.

The exempted money isn’t taxed until your spouse passes away, but this arrangement only concerns spouses who are U.S. citizens. If your spouse isn’t a U.S. citizen, the government wants the taxes paid upon your death. To prevent this, set up a qualified domestic trust, which must meet the following criteria:

  • At least one trustee must be a U.S. citizen or a U.S. corporation. If the estate is worth more than $2 million, then it’s required that one of the trustees be a U.S. bank.
  • Said trustee must have the right to withhold tax on any distribution of principal from the trust, or no distributions may be made.
  • The executor of the estate must state on your estate’s tax return that a QDOT trust has been created. This return must be filed within nine months after your death — and once the executor has elected to have the estate become a qualified domestic trust on the tax return, it is irrevocable.
  • Any other regulations put in place by the IRS must also be met. This stipulation has been put in place by the IRS to ensure that you’re aware that your estate may be impacted by any new regulations as they’re enacted.

Filing Taxes for a QDOT

When your spouse is a U.S. citizen, your estate is accessible to them in a way that it isn’t if your spouse is a non-citizen. When a QDOT is set up for your surviving non-citizen spouse, the trust is maintained by a trustee. There can be more than one trustee, and if there is, all are responsible for filing the tax forms necessary every year to keep the QDOT in good standing.

Sometimes, one person has been designated a “filer,” in which case that person handles all the paperwork. A filer is most often used when multiple trusts have been set up necessitating multiple trustees, or when there are multiple trustees assigned to the one trust. In either case, all trustees must complete the tax forms, but forward them to the filer so that an estate tax return may be filed in a timely manner.

Distribution Rules

At tax time, all distributions made must be assessed for tax filing purposes:

  • Estate taxes are due on distributions of principal from the qualified domestic trust. Generally, any money your surviving spouse receives from the domestic trust is taxed as income, not with the 40 percent estate tax.
  • If your surviving spouse passes on, the estate and properties must have their value assessed, minus any distributions that have been made.
  • If there were annuity payments made, the principal balance must be evaluated for taxing purposes.

In addition, taxable events need to be reported on the tax return. A taxable event is defined as any of the following:

  • Any distribution of monies from the principal balance of the trust, which includes certain types of annuity payments, to the surviving spouse. This includes both income distributions to your surviving spouse, plus any distributions made under the Rules of Hardship Distribution.
  • When your surviving spouse passes, then the trust needs to be assessed and taxed the next tax year.
  • If your trust fails to qualify as a QDOT, the IRS requires that all taxes must be paid at the time your estate falls under the status of having a beneficiary who’s not a U.S. citizen.

Note that these rules only apply when your spouse is a non-citizen. If your spouse becomes a U.S. citizen after your death, then the trust may be converted so that the spouse has access to the trust, as is the case for your surviving spouse who is a U.S. citizen.

Rules of Hardship Distribution

These rules are in place for emergency situations. If your spouse has what is termed “an immediate and substantial financial need,” the necessary money can be made available. A hardship distribution includes needs for someone who’s financially dependent on your spouse or whom your spouse is legally obligated to support. Hardships that qualify as immediate and substantial include:

  • Health issues
  • Life maintenance needs
  • Educational needs

Setting up a QDOT trust is a complicated business. Consulting best rated CPA in New York City, Miller & Company is in your best interest. The tax accounting experts can set up a trust for you so that you can be sure your loved ones are properly cared for in the event of your passing.

Do you have questions about services we offer including Qualified Domestic Trust in NYC and Long Island? Would you like to receive a personal Qualified Domestic Trust consultation customized to your specific needs? To schedule an appointment with a nationally recognized, best rated CPA in New York City, Paul Miller of Miller & Company LLP firm, please contact our Long Island or NYC tax accountants for a FREE CPA consultation.

Miller & Company LLP, NYC CPA Firm
Paul Miller, CPA (NY Certified Public Accountants)
141-07 20th Ave, Suite 101
Whitestone, NY  11357
(718) 767-0737

 

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