Estate Planning for
Non-US Citizens with a Qualifed Domestic Trust (“QDOT”)

     Estate planning is an essential part of preserving your assets and making sure they are transferred to those you wish to receive them. This can be accomplished easily by implementing the right plan . However, it can be more difficult if you or your spouse is not a United States citizen. Our society has become increasingly diverse with people from many countries taking up residence here, and as you might expect, special rules and requirements have been developed which requires additional and different estate planning for non-US citizens. With a “Qualified Domestic Trust” or “QDOT”, any estate taxes on the citizen spouse’s death may be postponed until the non-US citizen spouse dies thereby maintaining the entire value of the estate during the surviving spouse’s lifetime.

     Let’s look at how these rules may be applied. Assume the following facts for both examples.

     Betty and Bert are husband and wife and live in Florida. Betty is a United States citizen but Bert is not. They own a home and all of their assets are located in Florida. They have 2 children. They have a total estate worth $2,000,000. In Florida, each spouse is deemed to own ½ of their total assets at death.

Example 1: No estate plan has been implemented.

a. Assume that Bert died in 1999 leaving his $1 million to Betty. No problem. Betty was a US citizen and Bert could take advantage of the unlimited marital deduction and leave everything to Betty with no estate taxes due on his death. When Betty died in 2000 her estate was worth $2 million and she passed all of the assets to their 2 children. However, because the estate value exceeded Betty’s estate tax exemption of $675,000, her children had to pay estate taxes of about $480,550, which reduced the children’s $2 million inheritance to $1,519,450.

b. Now, assume Betty instead of Bert died in 1999 and left her $1 million to Bert, a non-US citizen. Problem. Because Bert is not a US citizen, he has no unlimited marital deduction available. The entire amount of Betty’s $1 million is immediately taxable at her death in the amount of $248,300. This reduced the amount that Bert received to $751,700. When Bert died in 2000, he had a total estate of $1,751,700. Though Bert was a non-citizen, as a US resident he was still allowed an estate tax exemption of $675,000 but because the estate value exceeded that exemption, his children had to pay additional estate taxes in the amount of $377,247, for total taxes of $625,547,which reduced the children’s $2 million inheritance to $1,374,453. In other words, because their mother, a US citizen, died before their father, a non-US citizen, the children’s inheritance was reduced by an additional $144,997.

Example 2: Betty and Bert established a Living Trust with Marital and Family trust provisions naming their children as beneficiaries. Because Bert was a non-US citizen, they also included provisions for a special kind of trust called a “Qualifed Domestic Trust” or “QDOT”.

a. When Bert died there were no estate taxes due on his $1 million. His entire $1 million, plus Betty’s $1 million, was in tact in the trusts and available for Betty’s use. When Betty died, both of the estate tax exemptions of Bert and Betty were deducted from the $2 million with estate taxes of only $211,300 leaving $1,788,700 for their children, an increase of $269,250 as compared with example 1a.

b. If Betty died first, although there is no unlimited marital deduction because she left her assets to Bert, a non-US Citizen, there is still no estate tax due on her $1 million at her death. This is because they had set up the QDOT which, although it did not eliminate the estate taxes attributable to her $1 million, it postponed the payment of the taxes until Bert’s death (or until he made withdrawals from the trust). If Bert died with a $2 million estate, the estate tax would be due on the entire $1 million Betty left plus the amount of Bert’s $1 million over his $675,000 exemption. In other words, on Bert’s death the taxes due would be $480,550, leaving $1,519,450 for their children, an increase of $144,997 to their children over the amount expressed in example 1 b.

     As you can see in Example 2, there are advantages of having a Living Trust which includes a “QDOT”. No matter which spouse dies first the children will receive a greater inheritance.

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