Key Takeaways
- Defers estate tax for non-citizen surviving spouses.
- Requires U.S. trustee and strict IRS compliance.
- Limits principal distributions to hardship cases.
- Taxed on remaining assets at surviving spouse's death.
What is Qualified Domestic Trust (QDOT)?
A Qualified Domestic Trust (QDOT) is a specialized irrevocable trust that enables a U.S. citizen spouse to defer federal estate taxes when transferring assets to a non-U.S. citizen surviving spouse. It qualifies these assets for the unlimited marital deduction, which otherwise would not apply to non-citizen spouses.
This trust is essential in estate planning for international couples, helping preserve wealth by postponing estate tax until the death of the surviving spouse.
Key Characteristics
A QDOT must comply with strict IRS requirements to ensure tax deferral benefits. Key features include:
- Primary beneficiary: The non-U.S. citizen surviving spouse married to the decedent.
- Trustee requirements: At least one trustee must be a U.S. citizen or U.S. corporation; for trusts exceeding $2 million, a U.S. bank trustee or a bond covering 65% of trust property is required.
- Distribution restrictions: Income is distributed freely, but principal requires trustee approval and withholding of estate taxes except for hardship cases.
- Asset location limits: For trusts under $2 million, no more than 35% of assets can be foreign real property annually.
- Election: The executor must elect QDOT status on the estate tax return timely filed.
How It Works
A QDOT typically forms part of the estate plan of a U.S. citizen spouse or can be established by the surviving spouse after death by irrevocably transferring inherited assets. The trust allows the non-citizen spouse to receive all income generated by the trust assets, which is subject to ordinary income tax.
Principal distributions are limited to hardship circumstances and require tax withholding. Upon the surviving spouse’s death, the remaining trust assets are included in their estate for estate tax purposes, taxed at the original decedent’s rates, thereby deferring taxes and protecting asset value.
Examples and Use Cases
QDOTs are especially relevant for high-net-worth individuals and multinational families:
- International couples: A U.S. citizen married to a foreign national can use a QDOT to avoid immediate estate taxes on transfers exceeding the federal exemption.
- Wealth preservation: Trust assets generate income to support the surviving spouse, similar to income distributions from dividend stocks.
- Corporate trustees: U.S. corporations such as Delta may serve as trustees, ensuring compliance and management of trust assets.
- Portfolio management: Incorporating large-cap stocks and other investments can help maintain the trust's value over time.
Important Considerations
Establishing a QDOT requires careful planning and compliance with IRS rules to avoid losing tax benefits. The surviving non-citizen spouse must understand that principal withdrawals trigger estate tax withholding except in hardship cases.
Since the trust assets remain subject to estate tax at the surviving spouse’s death, you should integrate QDOT planning with broader strategies like A-B trusts and evaluate low-cost, tax-efficient investments such as those outlined in best low-cost index funds.
Final Words
A Qualified Domestic Trust lets you defer estate taxes when passing assets to a non-citizen spouse, preserving wealth within the family. Consult an estate planning professional to ensure your trust meets IRS requirements and optimizes tax benefits.
Frequently Asked Questions
A Qualified Domestic Trust (QDOT) is a special irrevocable trust that allows a U.S. citizen spouse to defer federal estate taxes on assets passing to a non-U.S. citizen surviving spouse, enabling those assets to qualify for the unlimited marital deduction.
Without a QDOT, assets transferred directly to a non-U.S. citizen spouse trigger immediate federal estate taxes because they don't qualify for the unlimited marital deduction. A QDOT defers these taxes until the surviving spouse's death.
To qualify, the trust must have the non-U.S. citizen spouse as the primary beneficiary, include at least one U.S. trustee or U.S. corporation, follow strict distribution rules with tax withholding on principal, and the executor must elect QDOT status on the estate tax return.
The surviving spouse receives all income from the trust, but principal distributions require trustee approval and tax withholding, allowed only for IRS-defined hardships like health or support needs without liquidating major assets.
Yes, if the QDOT is not pre-established, the non-citizen surviving spouse can create it by irrevocably transferring inherited assets into the trust before the estate tax return deadline, although this leaves less time for proper setup.
Upon the surviving spouse's death, remaining QDOT assets are included in their estate for federal estate tax purposes, taxed at the deceased spouse's rates, and then passed on to the designated remainder beneficiaries.
Yes, for trusts under $2 million, no more than 35% of assets can be foreign real property annually. For trusts exceeding $2 million, stricter rules apply, including trustee requirements and bonding to cover potential taxes.
A QDOT allows deferral of immediate estate taxes on large asset transfers to a non-U.S. citizen spouse, preserving wealth within the family and providing income to the surviving spouse while postponing tax payments until their death.
