As both your assets and your family grow, your estate plan should grow with them. You will soon find that a simple Last Will and Testament is not sufficient to meet all of your estate planning needs and goals. One of the most common additions to an estate plan is a trust agreement. The type of trust you establish will depend on your goals and objectives. If you are married to a foreign national, or non-citizen, your estate planning attorney may suggest that you include a Qualified Domestic Trust, or QDOT. Only your California estate planning attorney can help you decide if a QDOT is right for your estate plan; however, to give you an idea why you might need a QDOT trust, an Inglewood trust attorney explains the basics of a QDOT trust.
There was a time – not all that long ago – when traveling outside your home country, for business or pleasure, was relatively rare. Only large businesses engaged in multi-national affairs. Advances in technology, science, and engineering over the last century changed all of that. The proliferation of internet users alone means that people all over the world can easily converse with people from numerous different countries and cultures with the click of a button. Faster and safer air travel also makes it easier to visit other countries for business or just vacation. One result of the disappearing international borders is a marked increase in “mixed-nativity,” or “cross-cultural” marriages. In the United States, for example, the Census Bureau reports that 20 percent, or one in five, marriages in the U.S. includes one foreign-born spouse. If you are among the 20 percent, estate planning should take on a heightened importance for you because of the need to protect your spouse.
What Is a QDOT Trust?
A QDOT trust is a specialized that allows you to provide for a non-citizen spouse without the help of the unlimited marital deduction that is so frequently used by married couples. Your spouse will be entitled to the interest from the trust assets but will not own the assets nor can your spouse access the principal held by the trust absent a showing of extreme hardship. AN extreme hardship requires your spouse to show an “immediate and substantial” need for money relating to “heath, maintenance, education or support” of either your spouse or someone your spouse is legally obligated to support, such as a child. When your spouse dies, the assets held in the trust will be distributed to the beneficiaries named in the trust, usually children. To understand why you might need to rely on a QDOT trust, you first need to understand a little more about federal gift and estate taxes and the marital deduction.
Federal Gift and Estate Taxes and Your Estate
Every estate is potentially subject to federal gift and estate taxes at the time of a taxpayer’s death. When you die, your estate will go through the legal process known as probate. During the probate process, any federal (and state if applicable) gift and estate taxes due must be paid before assets can be transferred to intended beneficiaries. The tax is levied on the combined value of all qualifying gifts made during your lifetime and the value of all assets owned by you at the time of your death. Each taxpayer is entitled to make use of the lifetime exemption which was permanently set at $5 million back in 2012, but is adjusted yearly as a cost of living increase. For 2017, the lifetime exemption amount is $5.49 million. If, for example, the combined value of your lifetime gifts and estate assets is $10 million at the time of your death in 2017, your estate would owe federal gift and estate taxes on $4.51 million at the rate of 40 percent.
The Unlimited Marital Deduction
One way to avoid paying any federal gift and estate taxes is to leave all your taxable estate assets to a spouse using the marital deduction. As the name implies, the unlimited marital deduction allows a taxpayer to leave an unlimited amount of assets to a spouse tax-free. Except, the marital deduction is not available if your spouse is a non-citizen. This is why a QDOT trust becomes necessary.
For more information, please join us for one of our upcoming free seminars. If you have additional questions or concerns about conservatorship in the State of California, contact the Collins Law Firm by calling (310) 677-9787 0r Click Here reserve for a Free Estate Planning Workshop.