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You might need a trust if your spouse isn’t a U.S. citizen

Ordinarily, there’s no estate tax on assets that pass at death to someone’s spouse. But that’s true only if the surviving spouse is a U.S. citizen. If the spouse isn’t a citizen, then the estate tax generally applies…unless you set up something called a “Qualified Domestic Trust,” or QDOT.

Instead of leaving your assets directly to your spouse, you can put them into a QDOT for his or her benefit. When you die, there is no estate tax on these assets. Your spouse can receive income from the trust during the rest of his or her lifetime. When your spouse dies, the assets will then be taxed as though they were part of your estate (not as though they were part of the spouse’s estate).

The trustee can also give some of the trust principal to the spouse, but only if there is a genuine hardship. If there’s no hardship, then any principal given to the spouse will be subject to estate tax right away.

There are some limits on who can be a trustee. Generally, there must be at least one trustee who is either a U.S. citizen or a U.S. bank. If the trustee is a U.S. citizen and the trust is worth $2 million or more (or if 35% of the trust consists of real estate outside the U.S.), then the trustee must provide a bond or irrevocable letter of credit covering some portion of the assets.

Why all this complexity? Well, generally the government doesn’t impose an estate tax on assets bequeathed to a spouse because it figures it can tax them later when the second spouse dies. But if the second spouse is a non-citizen, then the spouse could take the assets and leave the country, and the government wouldn’t collect any tax at all. The idea of the QDOT is to make sure that the government gets some tax revenue even if the second spouse isn’t a citizen.

Of course, this complexity can be avoided if the spouse is willing to become a U.S. citizen – which is a step that is sometimes considered when planning an estate since it can have a significant effect on taxes.

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