Estate Planning for Expats: Trusts & Non-Resident Spouses

Estate Planning for Expats: Trusts & Non-Resident Spouses
Updated on February 4, 2024

Qualified Domestic Trusts (QDOT) can help with expat estate planning for those who are married to non-resident citizens, in the event that one of you should become a widow. If you’ve ever wondered how a Qualified Domestic Trust can be used to defer payment of transfer taxes, read below to find out.

What Are Qualified Domestic Trusts?

In general, when a taxpayer passes away, the US does not seek to punish the surviving spouse from a tax perspective. As a result, the US allows for an unlimited marital deduction, which is a provision in US Federal Estate and Gift Tax Law that enables an individual to transfer an unrestricted amount of assets to his or her spouse at any time, including at the death of the transferor, free from taxation. This provision is used as an estate preservation technique for expat estate planning since assets can be distributed to surviving spouses without that spouse triggering estate or gift tax liabilities.

This method doesn’t absolve the transfer from taxes—it merely delays it. This is because upon the death of the surviving spouse, all assets in the estate over the applicable exclusion amount (for 2020, the combined estate and gift tax exemption is $11.58 million per individual, up from $11.4 million in 2019) will be included in the survivor’s taxable estate.

If a US citizen is the first spouse to pass away, and the surviving spouse is a non-resident alien (NRA), the rules are quite different. Non-US citizen spouses receiving lifetime gifts are taxed as if they were not married, save for the increased annual gift exclusion amount for such spouses (which is $157,000 for 2020). This can be quite problematic. This leads to the question: what can be done to help? Enter the QDOT.

QDOTs are trusts that permit taxpayers who survive a deceased spouse to take the marital deduction on estate taxes—even when he or she is not a US citizen—for any assets that are placed into the trust before the death of the decedent. What this means is that the surviving spouse pays no taxes on assets with no limit.

What Are the Downsides to This Expat Estate Planning Strategy?

As with anything pertaining to taxation, there are always tradeoffs. In this case, though a QDOT allows the qualifying non-citizen surviving spouse to take the marital deduction on assets inside the trust, it does not exempt the trust from paying the estate tax entirely. Still, it does defer such tax until the death of the surviving NRA spouse. Then, at that time, the estate will trigger estate taxes on all assets in the QDOT. This is true whether or not there are surviving trustees, which could reduce the value of the assets in the trust significantly for any surviving trustees.

What Are the Requirements for a Trust to Qualify as a QDOT?

Several key criteria must be met for a trust to legally qualify as a QDOT:

  • The executor must elect to treat the trust as a QDOT on the estate tax return.
  • All distributions of principal from the QDOT to the surviving spouse during their lifetime or at their death will be subject to payment of estate tax, and this tax is computed as if the distributions were included and taxed in the first spouse’s estate.
  • The terms spelled out in the trust documents of the QDOT must state that all income is distributable to the surviving non-citizen spouse.
  • The trustee of the QDOT must be a citizen of the US.
  • If the property transferred to the QDOT has a value that exceeds $2 million (based on the values finally determined for estate tax purposes and ignoring any indebtedness on the property) at least one trustee must be a US bank, the trustee must post a bond with the IRS equal to 65% of the fair market value of the property transferred to the trust, or the trustee must furnish the IRS with a letter of credit of 65% of the fair market value of the property transferred to the trust. Also, if the property transferred to the QDOT has a value that is $2 million or less (based on the same valuation listed above), then either no more than 35% of the trust property determined annually on the last day of the trust’s tax year will consist of foreign real property, or the trust will meet the bank, bond, or letter of credit rules above.

What Are the Tax Implications of a QDOT Arrangement?

Keep in mind the following tax implications for a Qualified Domestic Trust.

  • The QDOT should be taxed as a simple trust for income tax purposes.
  • The assets transferred into the QDOT are eligible for the unlimited marital deduction.
  • Each distribution from the QDOT triggers the federal estate tax.
  • Form 706-QDT must be filed annually to report the amount in the trust as well as the distributions made from the trust.

Want Some Help With Expat Estate Planning?

The rules surrounding QDOTs can be cumbersome to navigate, to say the least. Greenback accountants work solely with expats and can give you the best tax advice for your specific financial situation. Sign up for a consultation with the experts today.

Confused about when you need to file? We can help.

When you live in the US, tax day is simple: April 15th! When you move abroad, it’s not so straightforward! Learn about all the expat deadlines and extensions you need to know to file.

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