Qualified Domestic Trusts (QDOT)

There is an unlimited marital deduction against gift or estate taxes if property passes from the donor to his surviving spouse, but not if the donee is not a United States citizen. The purpose of the marital deduction is to defer the estate tax until the death of the surviving spouse but not to allow the elimination of the estate tax. The justification for the marital deduction is that it will provide support for the surviving spouse and the transferred property will be includable in her estate. However, if the surviving spouse is not a United States citizen, then there is a good possibility that the United States will not be able to collect an estate tax from the estate of the noncitizen spouse.

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However, the law does provide an exemption amount for annual gifts, which is adjusted annually for inflation, that can be given free of gift or estate tax to a noncitizen spouse. This exemption amount is in addition to the lifetime gift exemption that applies to gifts to others. IRC §2523(i)

Annual
Gift
Exemption
for
Non-Citizen
Spouses
Tax
Year
Exemption
Amount
2016 $148,000

2015

$147,000
2014$145,000
2013$143,000
2012$139,000

The law also provides a special type of trust, called a qualified domestic trust (QDOT) that allows the noncitizen surviving spouse to receive all income from the trust, and under certain circumstances, some principal. However, some countries have treaties with the United States that allows a different treatment of the noncitizen spouse. The QDOT qualifies for the unlimited marital deduction, and thus, no estate taxes are due on the trust property when the citizen spouse dies. IRC 2056(d)

However, when the surviving noncitizen spouse dies, the QDOT assets are subject to estate tax. A QDOT must meet the following requirements to qualify for the marital deduction:

The following additional requirements are to ensure that the U.S. government gets its tax money:

Estate taxes must be paid on any principal distributed to the spouse unless it is for hardship, which the IRS defines as an immediate need relating to health, maintenance, education, or support that cannot be met with any other reasonable means.

If the decedent spouse did not provide for a QDOT in his estate plan, then the surviving spouse can ask the IRS to reform the estate plan so that it meets the guidelines of a QDOT.

The trustee or other filer designated by the executor of the decedent's estate must file Form 706-QDT, U.S. Estate Tax Return for Qualified Domestic Trusts to report on certain distributions from the QDOT, certain annuity payments paid out of the trust principal, and to report the value of the property remaining in the QDOT when the surviving spouse dies.

It is also possible for the noncitizen spouse to become a United States citizen so that she can qualify for the unlimited marital deduction, even after the citizen spouse has died, but she must become a citizen either before the estate tax return is filed, which is usually 9 months after the death, or before any distribution of principal is made to the noncitizen spouse. If successful, then the surviving spouse will receive the full marital deduction, obviating the need for the QDOT. The trustee will have to file Form 706-QDT to inform the IRS that the surviving spouse has become a US citizen.