Oregonians can use this specialized trust for a taxpayer spouse who is not a US citizen
Love might not know boundaries or citizenship, but taxes do. Surviving spouses can be eligible for estate tax exemptions. However, a spouse who is not a US citizen is ineligible and may face much higher estate taxes. When providing for a spouse who is not a US citizen, your Oregon estate planning may require more speciality legal instruments to achieve favorable tax treatment.
Under many legal circumstances, a surviving spouse can often take full advantage of a tax deduction on estate taxes. However, when that spouse is not a US citizen, different rules come into play. A special type of trust can come in handy too. Otherwise, that surviving spouse may have a greater tax liability.
Trusts take many forms. A specialized type of trust available for use in Oregon is the QDOT, short for Qualified Domestic Trust.
About the Qualified Domestic Trust (QDOT)
Under the terms of a QDOT, a non-US citizen spouse can:
- Receive bequests under the terms of the trust
- Take advantage of tax deductions for assets inside the trust; and
- Fully utilize marital deductions on relevant estate taxes
Normally, a U.S. citizen surviving spouse can take advantage of marital tax deductions, but a non-citizen surviving spouse cannot. By establishing a QDOT, as long as you meet the relevant federal and/or Oregon requirements, your surviving spouse can take advantage of the same favorable tax treatments as a US citizen.
QDOT requirements
Like other trusts, a QDOT has to meet certain requirements in order to be valid and to provide the benefits intended. Some of those requirements include:
- A trust holds the assets
- The spouse is a citizen of another country than the USA
- Annual filing of Form 706-QDT, which reports both the amount held by the trust and documents distributions
- For income tax purposes, the QDOT needs to be taxed as a simple trust
- At least one trustee must be either a U.S. citizen, or a domestic corporation with the authority to retain estate tax
- Federal estate tax applies to any and all distributions from the QDOT; and
- On the estate tax return, the executor has to elect QDOT treatment of the trust
While these are not the only requirements, they give a good overview of the intricacies involved. Plus, setting up a QDOT can provide more than favorable tax treatment. It can also provide overall financial and lifestyle peace of mind for your surviving spouse.
Other considerations for a spouse who is not a US citizen
Discussing your specific situation with an estate planning attorney can help you set up the best solution for you and your spouse. Plus, your attorney can help you be aware of other circumstances that may be relevant to your situation. For example:
- While a QDOT can apply the marital estate tax deduction on trust assets, it doesn’t eliminate or zero out the tax burden entirely. After the death of the non-US citizen spouse, additional estate taxes may be levied and become due from the surviving heirs or beneficiaries.
- Green Card holders may face additional issues or considerations around bequests and estate assets. If QDOT is not set up properly, the assets could be at risk for being considered as part of a foreign trust, which could entail additional—and likely costlier—taxation.
- If the surviving spouse stops residing in the US and returns to their home country, trust assets could be at risk of being taxed as a foreign trust.
Typically in Oregon, an estate can pass $1 million in assets without being subject to the estate transfer tax. When the estate holds or bequeaths assets with a value surpassing $1 million, a surviving spouse who is not a US citizen can also discuss taking an election known as the Oregon Special Marital Property (“OSMP”). US citizenship is not a requirement for the spouse to take the OSMP election. Taking this election can help solidify the delay of estate transfer taxes during the surviving spouse’s lifetime.
A QDOT can preserve your marital assets and benefit your surviving spouse without undue tax liability
A QDOT is a specialized legal instrument, but in the right circumstances, a useful one. Establishing and managing this type of trust also requires a specific setup, along with discussion and planning for other scenarios relevant to your particular circumstances.
Is your spouse a citizen of another country? As you establish or update your estate plan, now is the time to see if a QDOT is right for you.
