Structuring QDOTs for Non-Citizen and Nonresident Spouses: Deferring Tax Through Qualified Domestic Trusts

Overcoming Unfavorable Exemption Rules for Non-U.S. Spouses, Utilizing Portability, and Maximizing Asset Transfers

Recording of a 90-minute CLE/CPE webinar with Q&A


Conducted on Tuesday, May 9, 2017
Recorded event now available


This CLE/CPE webinar will provide estate planning counsel advisers with a thorough and practical guide to the rules and structuring considerations to drafting qualified domestic trusts (QDOTs) for U.S. taxpayers with nonresident alien (“NRA”) spouses. The panel will offer specific guidance on when to best employ QDOTs, discuss the specific risks and benefits of the trusts, detail trustee and withholding requirements, and provide specific drafting examples.

Description

The permanent increase in the estate tax exclusion amounts for U.S. taxpayers has changed the focus for most estate planners from estate tax avoidance to income and gift tax minimization. However, for U.S. taxpayers (or NRA taxpayers with U.S. property) who have non-citizen spouses, estate tax planning remains a critical challenge. Estate planners and advisers to families with non-U.S. spouses must meet these challenges to avoid ruinous tax consequences. For these taxpayers, a Qualified Domestic Trust (QDOT) is often the only means of passing assets tax-free to non-citizen spouses.

In contrast to the high exclusion amount for citizens ($5,450,000 for individuals and $10,900,000 for a married couple), non-resident/non-citizens with U.S.-based property are only entitled to an estate tax credit equivalent to a $60,000 estate exclusion, unless a tax treaty grants a higher amount. Additionally, non-U.S. surviving spouses are generally not entitled to the unused portion of the deceased U.S. spouses unused exemption amount, eliminating the benefits of “portability.”

There are various ways to structure a QDOT to benefit a non-citizen spouse. For a trust to qualify as a QDOT, the trust document must contain specific provisions addressing trustee requirements and withholding remittances on distributions to the non-citizen spouse, among other issues. Estate planning counsel must understand components that must be part of a trust operating agreement for the trust to qualify as a QDOT.

Listen as our experienced panel provides a thorough and practical guide to QDOT strategies and structures, including sample language for critical provisions.

Outline

  1. Estate tax exemptions for nonresidents
  2. Terms of QDOTs
  3. Withholding and trustee provisions
  4. Benefits and risks of QDOTs
  5. Key structuring examples

Benefits

The panel will review these and other key issues:

  • What types of trusts qualify as QDOTs?
  • Structuring withholding provisions that will meet IRS requirements for QDOT designation
  • What specific trustee provisions and designations must a QDOT document contain to withstand IRS scrutiny?
  • Tax consequences and inclusions on death of U.S. spouse under various QDOT structures

Learning Objectives

After completing this course, you will be able to:

  • Identify provisions and drafting language that qualify for QDOT treatment
  • Decide whether a QDOT is appropriate for U.S. clients (or NRA clients with U.S. property) who have nonresident spouses and decide which type of trust structure is optimal
  • Recognize special provisions for trustees
  • Determine how to structure asset distributions and dispositions to comply with withholding provisions
  • Discern income and transfer tax consequences of QDOT structures upon death of U.S. or NRA spouse, utilization of DSUE, and distribution of assets to surviving non-citizen spouse

Faculty

Nancy O. Kuhn, Director
Jackson & Campbell, Washington, D.C.

Ms. Kuhn specializes in Federal and state tax matters and is the Chair of  the firm's Tax Group. She has a strong and diverse background in tax planning, representation of taxpayers before the IRS, and tax litigation. She advises clients with complex non-profit/for-profit structures including joint ventures, affiliated 501(c)(3)/501(c)(4)/527 entities, micro-finance non-profit/for-profit affiliations, supporting organizations, and domestic/international affiliated non-profit/for-profit entities. She also assists clients in navigating and negotiating favorable settlements in employment tax and individual collection matters. She represents clients with unrelated business taxable income planning, compliance, and IRS examination issues and also advises individuals with regard to foreign and domestic tax issues.

John C. Martin, Founding Partner
The Law Offices Of John C. Martin, Menlo Park, Calif.

Mr. Martin provides counsel in estate planning, trust, probate, business succession, charitable gifting, and estate and trust litigation matters. He advises clients on general estate planning and tax issues, including establishment of living trusts, California property tax matters and appeals, guardianship for minor children, conservatorships for the disabled, federal capital gains tax, modification of irrevocable trusts, and retroactive trust funding by court petition to avoid probate at death. He is certified as a Specialist in Estate Planning, Trust and Probate Law by the State Bar of California’s Board of Legal Specialization.

Jonathan A. Mintz, Partner
Evergreen Legacy Planning, Newport Beach, Calif. and Evergreen, Colo.

Mr. Mintz has more than 25 years’ experience in sophisticated case design and implementation for affluent families, helping US and international families achieve their unique asset protection, estate and business planning objectives. He is an Adjunct Faculty at Chapman University Fowler School of Law, where he teaches Estate Planning to law school and graduate tax students. He is also the Chair of the Orange County Chapter of the Society of Trust and Estate Practitioners (STEP), an international organization of professionals who practice in the areas of trusts and estates and international law. He is a frequent national speaker to attorneys, CPAs, and insurance and financial professionals, and authored or co-authored numerous articles including those published in top industry publications such as Estate Planning Journal, the AICPA’s The Tax Adviser, and The Journal of Financial Service Professionals. He also co-authored the book Wisdom for the Wealthy: Solving the High Net Worth Planning Puzzle (Crescendo Publishing 2015).


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Estate Planning Advisory Board

Gary D. Altman

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Altman & Assoc.

Brian M. Annino

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Annino Law Firm

Richard S. Franklin

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Franklin Karibjanian & Law

J. Leigh Griffith

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Waller Lansden Dortch & Davis

L. Paul Hood, Jr.

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Windels Marx Lane & Mittendorf

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Donna J. Jackson, Attorney at Law

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Giarmarco Mullins & Horton

Edwin P. Morrow, III, Esq.

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The Tippett Law Firm

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Perkins Coie

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