In a previous blog post, I discussed the requirements and characteristics of a Qualified Domestic Trust (QDOT) bond. This post supplements the previous one by including more helpful information.
Alternatives to QDOT bonds include irrevocable letters of credit or having a bank as the US trustee. A surety bond is the best option for an individual trustee because letters of credit can cost a lot of money and limit a trustee’s available credit.These three options only apply to QDOTs worth more than two million dollars.
Additionally, the trustee may deduct up to $600,000.00 worth of real estate from the amount of the bond or letter of credit. The real estate exception only applies to real estate owned by the QDOT, used as the primary residence of the beneficiary, or was passed down to the survivor through the QDOT via the marriage deduction on filed tax returns.
Sometimes the IRS requires a separate surety bond from the Estate of the deceased, or the Trustee, if the QDOT generates some income from shares of an ongoing business. The trustee has the option to pay estate taxes on this income in installment payments. If the Trustee opts for this method of estate tax payments, the IRS requires a bond guaranteeing the payment of those taxes. The IRS evaluates the need for a surety bond in these circumstances on a “case by case” basis.
When the IRS uses individual scrutiny to evaluate the need for a QDOT estate tax installment bond, sureties worry about the risks of “adverse selection.” This term describes a scenario where obligees only require bonds from principals with questionable characteristics, unique situations, or numerous red flags.
Qualified Domestic Trusts (QDOTs) are very complicated affairs. The IRS provides detailed instructions on their website. In order to underwrite these bonds, sureties will require a highly qualified professional to advise the Trustee or trust beneficiary. Approvable professionals include attorneys or Certified Public Accounts because they best understand the complexities of these obligations.