Election Must Be Made on the Estate Return, Form 706
Once the trust is drafted and fully executed, upon death of the maker (settlor of the trust) an election must be made on the decedent's Form 706 estate tax return to treat the trust as a QDOT.
Trustee Must Be a United States Citizen
There must be at least one US citizen serving as trustee.
Distributions From Corpus Are Subject to Withholding
An estate tax is imposed on any distribution from a QDOT made before the death of a surviving spouse beneficiary, as well as on the value of the property remaining in the QDOT on the date of death of the surviving spouse. As a result, distributions made from the corpus of the trust must first have estate tax withheld from any distribution.
Assets Passing In Excess of $2 Million Need United States Bank Trustee Or Bond Posted
If the assets passing to the QDOT exceed $2 million (not including a personal residence with a value of up to $600,000), the QDOT must have either:
- A United States bank as a trustee, or
- The US trustee must meet bond or letter or credit requirements.
What if a QDOT Ceases To Qualify
If the trust ceases to qualify as a QDOT, the fair market value of the property in the QDOT as of the date of disqualification will be taxed.
Certain Lifetime Distributions Are Exempt From Estate Tax
Distributions of income from the QDOT to the surviving spouse are not subject to the QDOT estate tax.
Distributions from corpus for hardship purposes are not subject to tax. If the surviving spouse has an “immediate and substantial” need for money relating to “heath, maintenance, education or support”—either his or her own, or that of someone he or she is legally obligated to support—a distribution of trust funds may qualify for a hardship exemption if the surviving spouse doesn’t have other reasonably available liquid assets.
However, even though hardship withdrawals are gift or estate tax free, they must be reported on Form 709-QDT.
Trustee Is Personally Liable For QDOT Tax
The trustee is personally liable for the taxes imposed, so due care must be exercised by the trustee to avoid individual liability for any estate taxes.
When Are Taxes Due
The QDOT tax is due on the 15th day of the fourth month of the year after the year in which the distribution took place.
A six month extension can be requested under Section 6081(a) if the provisions of this section are met.
This is a very technical area of the tax law and the above is only an overview of some of the requirements. Creating a QDOT often involves millions of dollars and complicated IRS rules. Obviously, you’ll need advice from an experienced estate and tax attorney about the advisability and mechanics of setting up this kind of trust to insure the proper structuring and drafting of a QDOT.
Copyright © 2011, Steven J. Fromm
Patrick, October 12, 2011:
helping my partner and I to create a secure and satisfying estate plan, which meets or exceeds all of our wishes and contains contingencies for everything from medical issues to wealth management and living wills. In this process, Steven has also become a friend. If you need Estate Planning, Tax Advice, a Will or a trust, etc., we highly recommend Steven Fromm, Esquire. He will listen and be sensitive to your unique situation."