A Qualified Domestic Trust (QDOT) is set up in order to preserve the marital deduction when a surviving spouse is not a United States citizen. Without the benefit of the unlimited marital deduction these assets could become subject to estate taxes on the first death.

The marital deduction allows the unlimited transfer of assets between spouses at death. The result is that the surviving spouse does not have to pay any tax on the estate of the first to die, provided the surviving spouse is a citizen of the United States.

The problem is that a marital deduction is not allowed for a surviving spouse who is not a US citizen and who does not become a citizen by the time the estate tax return is filed. However, the marital deduction can be used if the assets are transferred into a Qualified Domestic Trust (QDOT).

Mechanics of a QDOT
There are several requirements for a trust to qualify as a QDOT:

  • At least one trustee must be a U.S. citizen or a U.S. corporation.
  • The executor must elect on the decedent’s estate tax return to treat the trust as a QDOT.
  • The trust must meet Treasury regulations regarding the collection of any tax.
  • No distribution can be made from the trust, except for income, unless the trustee who is a U.S. citizen or corporation has the right to withhold estate taxes from the distribution.

At the death of the surviving spouse, the current value of the assets in the QDOT is subject to estate taxes as though they were included in the estate of the first spouse to die. These assets are not included in the surviving spouse’s estate.

Other taxable events include distributions of principal and termination of the trust’s QDOT status.

Benefits include:

  • The deferral of estate tax by qualifying for federal estate marital deduction
  • Retirement Plan Distribution Planning: There are several options to enable transfers to a non-U.S. citizen spouse to qualify for the marital deduction at death. If the spouse is the decedent’s primary beneficiary, he or she may keep the decedent’s retirement plan assets in the decedent’s account or roll them over to a traditional IRA, and
    1. pay a deferred estate tax on a portion of each payment as received, or
    2. transfer the taxable portion of each payment to a qualified domestic trust (QDOT) created by the decedent’s will or trust, by the decedent’s spouse after the decedent’s death, or by the decedent’s estate executor.

another option is to name a QDOT as the decedent’s primary beneficiary, if allowed by the decedent’s retirement plan. Or, if the decedent’s spouse is the beneficiary, he or she can roll over the retirement assets into a QDOT that is also a traditional IRA (QDOT-IRA) to qualify for the marital deduction.