Qualified Domestic Trust (QDOT)

*Overholser Mansion by Kool Cats Photography is licensed under CC 2.0. *

The federal estate tax provides an exemption for property inherited by a surviving spouse known as the marital deduction. The marital deduction is not available, however, when the surviving spouse is not an American citizen. The United States government does not want a noncitizen spouse inheriting a large estate and then returning to his or her native county without ever paying estate taxes on the inheritance.

So, if you have a large estate and your spouse is not a United States citizen, the estate tax will be levied on any amount of your estate in excess of the exclusion amount at the time of your death, even if your surviving spouse inherits everything. A qualified domestic trust, or QDOT, helps avoid this undesirable result.

In this situation, you can leave any amount in excess of the exclusion amount to a QDOT. Any property left to a QDOT can take advantage of the marital deduction and will therefore not be subject to the estate tax until the death of your surviving noncitizen spouse.

Requirements of a Qualified Domestic Trust

To qualify for the favorable estate tax treatment described in this post, the QDOT must meet the following two requirements:

1. The trust must have a trustee who is a citizen of the United States or is a United States artificial entity, such as a corporation. It is possible, however, to have this requirement waived.
2. Estate taxes will be due on any principal the trust distributes, so to avoid the estate tax, only income produced by the trust property may be distributed to the surviving spouse. The surviving spouse will then pay income tax on the distributions in the year he or she receives them, but the trust is not required to distribute all of the trust income.

If these requirements are met, the property in the trust will avoid the estate tax during the life of the surviving spouse, and then any amount left in the trust at the surviving spouse’s death will be subject to the estate tax.

Estate Tax Deferment

Like property normally inherited tax-free by virtue of the marital deduction, a QDOT is not intended to serve as a way to reduce or eliminate estate taxes owed. Rather, it simply defers the taxes due until the death of the surviving spouse. The trust seeks to put the surviving spouse and the government in the same situation they both would have been had the surviving spouse been a citizen of the United States at the decedent’s death.

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See Also:

The Federal Estate Tax

Irrevocable Life Insurance Trust (ILIT)