Using a Qualified Domestic Trust to Qualify for the Estate Tax Marital Deduction

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One of the key concepts of estate tax planning for married couples is the ability to defer estate taxes until the death of the second spouse. Any property that passes to the surviving spouse reduces the size of the deceased spouse’s taxable estate. This is known as the marital deduction. However, if the surviving spouse is not a citizen of the United States, the deceased spouse’s estate qualifies for the marital deduction only under very limited circumstances.

The deceased spouse’s estate will qualify for the marital deduction if:

  1. The surviving spouse becomes a US citizen before the estate tax return is filed and the surviving spouse was living in the US from the date of the deceased spouse’s death until the date of naturalization; or
  1. The property passes to or is placed in a Qualified Domestic Trust (“QDOT”) after the deceased spouse’s death.

Additionally, the QDOT must satisfy very specific requirements set forth in the Internal Revenue Code and accompanying Treasury Regulations to qualify for the marital deduction, including the following:

  • At least one trustee of the trust must be a US citizen or domestic corporation;
  • The trust must prohibit distributions unless the US trustee has the power to withhold any taxes resulting from the distribution; and
  • The trust must comply with certain security requirements set forth in the Treasury Regulations that are designed to ensure any such taxes may be collected.

The personal representative for the deceased spouse must make an irrevocable election on the deceased spouse’s estate tax return to treat the trust as a QDOT. If the property passes directly from the deceased person to his or her spouse, it must be transferred or irrevocably assigned to the trust before the estate tax return is filed. Any distributions of principal from the trust are subject to estate taxes, and the remaining assets of the trust upon the surviving spouse’s death are subject to estate taxes. While the QDOT can be created by the surviving spouse or the personal representative of the deceased spouse’s estate, it is generally advisable to incorporate the QDOT in an individual’s estate plan while still living.

If you have any questions about this article or estate planning generally, please feel free to contact Randall W. Sayers at 651-332-8725; rsayers@hansendordell.com.