One of the reasons why you should engage an estate planning attorney is because of the fact that there is an ideal way to address any situation, even those that are out of the ordinary. With this in mind, we will look at the legal device called the qualified domestic trust (QDOT) in this post.
Estate Tax Overview
In order to understand the value of the QDOT, you have to absorb some information about the federal estate tax. This tax carries a 40 percent top rate, so it can take a hefty bite out of your legacy.
There is an estate tax exclusion that represents an amount that can be transferred before the estate tax would be applicable on the remainder. Right now, it is $11.7 million, and this is the highest it has ever been.
This exclusion amount was put into place after the Tax Cuts and Jobs Act was passed at the end of 2017. During that year, the exclusion was $5.49 million, so it was essentially doubled to $11.18 million for 2018. Since then, there have been annual inflation adjustments.
The exclusion provision contained within this measure is going to sunset at the end of 2025, and when this takes place, the exclusion will go back down to $5.49 million. In fact, this can potentially happen sooner, because President Biden has expressed a desire to reduce the exclusion.
In addition to the federal estate tax, we have a gift tax, and the taxes are unified under the tax code. If you were to give away $11.7 million in tax-free gifts while you are living and you die this year, the entirety of your estate would be subject to taxation.
Since the exclusion is scheduled to be cut in half, a golden opportunity exists right now. You could choose to give gifts to your loved ones while the estate tax is still at the record high level.
We should also point out the fact that Connecticut is one of 12 states with state-level estate taxes, and we also have a gift tax. The exclusion on the state level is $7.1 million.
Marital Deduction
There is no estate tax on transfers between spouses, because there is an unlimited marital deduction. However, this deduction is only available to citizens of the United States, so you cannot use it if you are married to a citizen of another country.
QDOT
The qualified domestic trust is the widely embraced solution for high net worth individuals that are married to foreign citizens.
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 that would inherit the resources after the death of your spouse.
You name a trustee to serve as the trustee administrator when you are creating the trust declaration. This is not the case with trusts in general, but with a qualified domestic trust, at least one of the trustees must be a United States bank.
If you predecease your spouse, the trustee would distribute earnings that are generated by the assets in the trust to your spouse. These distributions would not be taxable from an estate tax perspective, but they would be looked upon as regular income by the IRS.
Portions of the principal could potentially be distributed as well, but the estate tax would be levied on these distributions, with one exception. The IRS can be petitioned to grant a hardship exemption when certain circumstances exist.
After the death of the surviving spouse, the successor beneficiaries would inherit the assets that remain in the QDOT. The estate tax would be a factor at that point, but there would be just a single instance of taxation across two generations.
We Are Here to Help!
We can help you devise an estate tax efficiency strategy if taxation is a concern, but this is not the only reason to work with a Hartford estate planning attorney to develop your plan.
As we touched upon in the opening, there are different ways to proceed, and the ideal approach will depend on the circumstances. When you choose our firm, you can rest assured that you will come away with a personalized estate plan that ideally suits your needs.
If you are ready to get started, we can be reached by phone at 860-548-1000, and you can use our contact form if you would prefer to send us a message.
Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.
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