The Facts about QDOTs: Beware of Estate Tax Traps
Slott, Edward A., The CPA Journal
The Qualified Domestic Trust (QDoT) may be used for non-US. citizen surviving spouses to defer the loss of significant estate tax benefits savings which have been otherwise eliminated by current law. However, strict adherence to QDoT provisions and proper planning is a must for those intending to benefit from it. The QDoT statute loaded with estate tax traps for the unwary due to the haste with which the laws were drafted and the absence of regulations and proper transitional provisions. Certain distributions from QDoT's may cause severe and unexpected estate tax liabilities including the loss of the marital deduction.
TAMRA 88 disqualifies the marital deduction to an estate of a decedent whose surviving spouse is not a U.S. citizen (IRC Sec .2056(d)).
Using the QDoT (IRC Sec. 2056A) will temporarily (until the death of the non-citizen surviving spouse) secure the marital deduction for the estate of an individual whose surviving spouse is not a U.S. citizen. The purpose of the QDoT is to make sure that a non-citizen surviving spouse would not escape estate tax on his or her death by residing outside the U.S. QDoT was created by TAMRA as a vehicle by which the marital deduction could be allowed for property passing to the non-citizen surviving spouse and at the same time, provide the government with some assurance that the property will eventually be taxed in the estate of the non-citizen surviving spouse. The QDoT in effect is an exception to the rules created by TAMRA. The QDoT provisions are effective for estates of decedents dying after November 10, 1988.
The QDoT provisions do not apply to certain estates of decedents (dying before December 19, 1992) who are residents or citizens of the U.S. and also are residents of foreign countries engaged in a tax treaty with the U.S. with respect to estate, inheritiance and gift tax. These treaties are designed to prevent double estate and gift taxation of the same property. A listing of the many countries included in the treaties can be found in Pub. L. No. 101-239, Sec. 7815(d)(14), 12/19/89.
The marital deduction will be allowed if the non-citizen surviving spouse becomes a U.S. citizen before the estate tax return is filed and resided in the U.S. from date of the decedent's death to date of U.S. citizenship (IRC Sec. 2056(d)(4)). However, obtaining citizenship after the decedent spouse's death may not be the most practical solution in light of the time and bureaucratic delays and also considering the surviving spouse's state of mind. The best and most simple solution is advance planning, i.e., to obtain U.S. citizenship before the death of the citizen-spouse, if possible. This will alleviate the need to comply with the stringent QDoT requirements.
The QDoT operates as follows: QDoT Election The QDoT must be elected by the executor on Form 706, Schedule "M," line 3. The election is to be timely made on either the last estate tax return filed before the due date (including extensions) or, if no timely return is filed, on the first return filed after the due date. Elections made on or after May 5,1991, must be made within one year after the due date of the estate tax return (including extensions) (IRC Sec. 2056A(d)). The election once made is irrevocable.
TRUSTEES. At least one trustee of the QDoT must be a U. S. citizen or a domestic corporation (IRC Secc 2056A(a)(1)(A)).
APPROVAL OF DISTRIBUTIONS. No distributions of trust corpus may be made unless the U.S. citizen or domestic corporation trustee has the right to withhold estate tax (imposed on QDoT) from the distribution, i.e., no distributions can be made without the approval of such trustee (IRC Sec. 2056A(a)(1)(B)). Each trustee is personally liable for the tax imposed.
ASSURANCE OF COLLECTION OF ESTATE TAXES. The QDoT must meet the requirements of forthcoming regulations that will "ensure the collection" (IRC Sec. 2056A(a)(2)) of estate taxes. …