Estate planning is essential to maximize the gifts you leave behind to your beneficiaries. However, if you are not an American citizen or resident, you must be aware of the differences in the law when if comes to planning your estate. The differences can be unfavorable. Also, marital deductions are not permitted for the estate of a citizen or US resident where the beneficiary is a non-resident spouse. Fortunately, establishing a Qualified Domestic Trust, QDOT, can be a viable option to increase tax deductions.
When a QDOT is established, the estate is treated as the surviving spouse's and is therefore taken through lower tax brackets. In order to qualify, a trust must name at least one US citizen or domestic corporation as a trustee. Additionally, the trust must be structured so that there are proper provisions for the collection of taxes through the US Treasury. If the estate that will be passing into the QDOT exceeds $ 2 million, one of the trustees must be a domestic corporation or a bond must be taken out for 65% of the fair market value of the estate-to insure payment of taxes. If the estate is under the $ 2 million mark, then the law says that no more than 35% of the estate can be held in the form of real property located outside the US
The regulations are particularly flexible regarding the ability for someone other than the decedent to establish a QDOT, like the surviving spouse, a representative of a surviving spouse, or the executor for the estate. Still, it is best to handle this type of matter as early as possible.
There are some drawbacks to establishing a QDOT that must be weighed as well. Because the designated trustee will act as the withholding agent he or she may be personally liable for the taxes if they are not withheld or are withheld incorrectly. Additionally, if the estate is entrusted to a corporate trustee, there may be some administrative burdens. For example, if the estate has no liquid assets (those that cannot be easily taken out as cash, like real estate), then there may not be enough cash flow to pay trustee fees (fees must be paid to trustees to manage the estate) or to pay the bond fees if one was taken out. In this case, assets may need to be sold to cover costs, which may be difficult or unwanted. Because of the many pros and cons associated with QDOT, it is best to have an experienced professional evaluate your estate and determine if a QDOT is the most economical way to setup your estate.
Whether you choose to use a QDOT or plan your estate in some other manner, it is integral that you look at your options with an attorney who not only specializes in estate planning but is also knowledgeable about the nuances of working with non-residents in order to maximize the value of the estate you leave behind to your loved ones.