People in the legal field use acronyms to describe devices with long names, and one of them is the QDOT. This is a type of trust that can be useful for high net worth individuals that are married to citizens of a country outside of the United States.
Federal Estate Tax Overview
The federal estate tax can have a significant impact on the legacy that will be passed along to your loved ones if you are in possession of a considerable amount of wealth. It carries a 40 percent top rate, and it is applicable on the portion of an estate that exceeds $11.7 million.
This figure is called the exclusion, and it has never been higher. The record high exclusion was included in the Tax Cuts and Jobs Act that was enacted at the end of 2017.
It is scheduled to remain in place through 2025, and in 2026, the exclusion will go down to $5.49 million if there are no legislative changes in the meantime. President Biden and other Democrats are in favor of a reduction, so the timetable could potentially be accelerated.
You should definitely monitor the progress over the next few years if your estate may be subject to taxation.
There is a federal gift tax that is unified with the estate tax, so the $11.7 million exclusion includes large gifts and the estate that will be transferred after your passing.
In light of the pending reduction dynamic, you may want to give gifts in the near future while the exclusion is still at a record high if the estate tax is a source of concern.
We should also point out the fact that we have a state-level estate tax in Illinois with a $4 million exclusion.
The estate tax is not applicable on transfers between spouses because there is an unlimited marital deduction, but there is an exception to the rule. If you are married to someone that is a citizen of another country, you cannot use the unlimited marital deduction.
Qualified Domestic Trust
A QDOT can be used to gain estate tax efficiency if you are married to someone that is not a citizen of the United States.
To implement this strategy, you fund the trust and you name a trustee to act as the administrator. If the trust will hold more than $2 million, at least one of the trustees must be a United States bank.
Your surviving spouse would be the first beneficiary of the trust, and your children or another party of your choosing would be the successors. The trustee would distribute the trust’s earnings to your surviving spouse if you pass away first, and the estate tax would not be levied.
You can give the trustee the latitude to distribute portions of the principal when you draw up the trust agreement. If this transpires, those distributions would be subject to the estate tax unless a hardship exemption was granted by the Internal Revenue Service.
After the death of your surviving spouse, your children or the other beneficiary or beneficiaries that you name would inherit the resources that remain in the trust. The estate tax would be applicable, but there would be just one instance of taxation.
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