Qualified Domestic Trusts (QDOT): Planning for Non-Resident Alien Spouses

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Paul Sundin, CPA

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If you’re married to a non-resident citizen, it’s important to plan your estate accordingly should one of you die. One of the largest concerns for anyone is the taxation the estate and spouse will undergo as a result of the inheritance.

A Qualified Domestic Trust can help defer tax liabilities, but you must know how and when they are applicable.

How do Estate Transfer Taxes Work?

In the United States, the IRS doesn’t tax estates when they’re transferred to a surviving spouse. There is an unlimited marital tax deduction, which allows a spouse to transfer his/her entire estate to their spouse either while alive or upon their death without the risk of taxation.

Does this eliminate all tax liabilities on the estate?

No – it delays it until the surviving spouse passes away. Only then will the estate be taxed, but only on the amount above the current exclusion amount, which in 2021 is $11.7 million per person.

If you transferred $12 million for example, when your spouse dies and leaves the money to other beneficiaries, the estate will be taxed on the $300,000 excess.

This only applies if both spouses are United States citizens. If one spouse is a non-alien resident spouse, there are different rules.

Non-Resident Alien Spouse Rules

Non-resident alien spouses are taxed as if they weren’t married, which is unlike the tax treatment of two citizens. The only exclusion is the annual gift exclusion amount, which is $159,000 in 2021.

If you have a large estate, this could be a serious issue, which is why many people consider a Qualified Domestic Trust. This can also help when it comes to getting Form 5173.

What is a Qualified Domestic Trust?

A Qualified Domestic Trust gives non-resident alien spouses similar benefits as US citizens upon a spouse’s death. If a non-resident alien survives his/her citizen spouse, they can take the marital deduction on the estate like a citizen would, but this only applies to assets put into the trust before the spouse’s death.

In short, the non-resident alien spouse wouldn’t pay taxes on any part of the estate that is in the trust.

How Trusts Qualify as QDOT

  • At least one trustee must be a US citizen
  • If the trust’s estates exceed $2 million, at least one trustee must be a US bank
  • The executor must file the deceased’s tax returns within 9 months of his/her death and must make a QDOT election

All income the surviving spouse receives from the trust is taxable at his/her income tax rate, but not the estate tax rate. The surviving spouse doesn’t own the assets – the trust owns them, but any income he/she receives is taxable.

However, if the trustee gives the non-resident alien spouse any money from the trust’s principal (not earnings), the money may be subject to estate taxes. There are certain exceptions, though, according to the IRS.

If the surviving spouse has an immediate and dire need for the funds to take care of health, education, maintenance or support, the money may qualify as a hardship exemption and be exempt from state taxes.

Final Thoughts

Expat estate planning requires careful planning and following the letter of the law. It can get confusing, so it’s important to have professional support to ensure you’re following the law and not paying unnecessary taxes on money that would be exempt.

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Estate CPA

Gilbert, AZ