When you achieve your financial goals, you can breathe a sigh of relief and enjoy your good fortune. However, there is one negative that goes along with a high level of financial success.
Estate taxes can significantly impact your legacy. There is a federal estate tax that people all around the country have to contend with, and some states have state-level estate taxes. Fortunately for us, New Jersey is not among them.
In this post, we will look at the qualified domestic trust (QDOT), which is a legal device that can be used to provide estate tax efficiency for non-citizen spouses.
Federal Estate Tax Parameters
The estate tax is only a factor for high-net-worth individuals because you can use the credit or exclusion to transfer a certain amount tax-free. In 2024, the federal estate tax exclusion is $13.61 million.
A logical reaction to the estate tax would be lifetime gift-giving, but there is a gift tax in place to prevent this practice. The estate tax and the gift tax are unified, so the multimillion-dollar exclusion applies to large gifts and your estate.
However, there is an annual gift tax exclusion that sits apart from the unified lifetime exclusion. It allows each taxpayer to give a certain amount to any number of individuals each year free of taxation. In 2024, this exclusion is $18,000 per person.
We should point out the fact that this is the highest the unified exclusion has ever been, and it exists because of a provision contained within the Tax Cuts and Jobs Act. This measure was enacted at the end of 2017 when the estate tax exclusion was $5.49 million.
When 2025 comes to a close, the provision will sunset, and the exclusion will revert back to the $5.49 million that we had in 2017 indexed for inflation. You should keep this in mind over the next few years if you are in possession of an estate that is in taxable territory.
Marital Deduction Citizenship Requirement Qualified Domestic Trust
There is an unlimited marital deduction that can be used to transfer any amount of property to your spouse estate tax-free if you and your spouse are American citizens. If you are a citizen, and you are married to a non-citizen, you would not be able to use the deduction.
Qualified Domestic Trust
There is a solution in the form of a qualified domestic trust. To implement this strategy, you fund the trust, and your spouse would be the initial beneficiary. Your children or anyone else that you choose would be the successor beneficiaries.
Assuming you predecease your spouse, the trustee that you name in the document would distribute the trust’s earnings to your surviving spouse for the rest of their life. These distributions would not be subject to estate taxes, but regular income taxes would be applicable.
The trustee could be given the latitude to provide discretionary distributions of the principal, but they would be subject to estate taxes unless a hardship exemption has been granted by the IRS.
After your spouse’s death, the successor beneficiary or beneficiaries would inherit the resources in the trust. The estate tax would be a factor at that time, but there would be just one round of taxation.
If you were to leave a direct bequest to your non-citizen spouse, the estate tax would be applied on the transfer, and it would potentially be levied again after the death of your spouse.
Access Our Estate Planning Worksheet!
We have a great resource that you can access right now free of charge that will give you a more thorough understanding of this important process. Our estate planning worksheet has been carefully prepared to help you build on your knowledge, and it is highly recommended.
To get your copy, visit our worksheet access page and follow the simple instructions.
Need Help Now?
As you can see from this post, there are targeted solutions that can be implemented to satisfy very specific objectives. When you work with our firm, we will gain an understanding of your situation and make sure that you walk away with a plan that ideally suits your needs.
You can schedule a consultation at our Warren, New Jersey estate planning office if you call us at 908-222-8803. There is also a contact form on this site you can use if you would prefer to send us a message, and if you reach out electronically, you will receive a prompt response.
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