Why is this Topic Important to Wealth Managers? This blogticle is a follow-up to the discussion presented yesterday on international estate planning considerations for non-resident aliens generally. We have again provided this information for wealth managers with international clients who may have estate tax issues to contend with.
How is a qualified domestic trust (“QDT” or “QDOT”) used between a citizen, resident, or nonresident alien and his/her non-citizen spouse particularly for estate tax planning purposes?
One of the major planning tools that wealth managers will often take advantage of with regards to estate tax for married couples is the use of the unlimited marital deduction. However, when planning for a client with a non-citizen spouse it is important to note that Congress has eliminated the unlimited marital deduction for assets passing to a non-citizen spouse for estate tax purposes.
Nevertheless, property passing to a citizen spouse or to a qualified domestic trust qualifies for the marital deduction. In addition, if the surviving spouse is a U.S. citizen, then the estate of the donor spouse is entitled to the marital deduction even if the donor spouse is a nonresident alien.
The use of a QDT may provide relief to those who are unable to take advantage of the unlimited marital deduction directly.
The QDT was created statutorily by Congress. Its function, like the unlimited marital deduction, is to allow a non-citizen spouse to defer estate tax on the donor spouse’s otherwise taxable assets until the death of the surviving spouse, or until otherwise the QDT loses its status as such.
First, the QDT instrument generally requires that at least one trustee of the trust be an individual citizen of the United States or a domestic corporation.
The trust instrument needs to also provide that no distribution (other than a distribution of income) may be made from the trust unless a trustee who is an individual citizen of the United States or a domestic corporation has the right to withhold from such distribution the tax imposed by this section on such distribution.
Second, if the fair market value of the assets passing, treated, or deemed to have passed to the QDOT (or in the form of a QDOT), determined without reduction for any indebtedness with respect to the assets, as finally determined for federal estate tax purposes, exceeds $2 million as of the date of the decedent’s death the trust instrument must meet the following requirements:
- The trust instrument must provide that whenever the Bank Trustee security alternative is used for the QDOT, at least one U.S. Trustee must be a bank as defined in Code section 581;
- The trust instrument must provide that whenever the bond security arrangement alternative is used for the QDOT, the U.S. Trustee must furnish a bond in favor of the Internal Revenue Service in an amount equal to 65 percent of the fair market value of the trust assets (determined without regard to any indebtedness with respect to the assets) as of the date of the decedent’s death; or
- The trust instrument must provide that whenever the letter of credit security arrangement is used for the QDOT, the U.S. Trustee must furnish an irrevocable letter of credit issued by a bank as defined in section 581, a United States branch of a foreign bank, or a foreign bank with a confirmation by a bank as defined in section 581.
The third and final requirement is that an election under the Code must be applied to such a trust by the executor. 
For additional information on this subject see AMAFX: Nonresident Aliens and Citizens of U.S. Possessions.
Tomorrow’s blogticle will present a special series on ETFs.
We invite your questions and comments by posting them below, or by calling the Panel of Experts.
 IRC § 2056A.