Qualified Domestic Trusts

Citizenship Issues

For married couples who are U.S. citizens there is no estate tax at the first spouse's death, regardless of the size of the estate, if all the assets go to the surviving spouse.  This is not the case for a surviving partner if the couple was not legally married under federal law.  It is also not the case even for a married couple if the surviving spouse is not a U.S. citizen.

If a non-citizen spouse inherits from a deceased spouse more than the exemption amount in the year of the first spouse's death, estate tax is owed on the excess amount.  This amount, keep in mind is inclusive of death benefits of life insurance and retirement accounts, unless excluded through irrevocable trusts.

But as a law professor of mine once glibly states, if there's a fee there's a way, and here is no different.  The recommended planning for a non-citizen surviving spouse is a Qualified Domestic Trust (QDOT).  The QDOT requires a co-trustee who is a U.S. citizen (who can be a child, friend, whomever) or requires a corporate trustee of the QDOT value exceeds two million dollars.

Because of the potential volatility of an estate, due to life insurance proceeds especially, and the unpredictability of the exemption amounts under the federal estate tax law (which could go to one million dollars per person in 2011 unless the current law is re-written), it is extremely important and highly recommended to have or at least seriously consider having a QDOT for any married couple when one or both of the spouses are non-U.S. citizens.