Qualified Domestic Trusts (QDOT)

There is an unlimited marital deduction against gift or estate taxes if property passes from the donor to his 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 to 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.

However, the law does provide an exemption amount for up to $134,000 per year, which is adjusted annually for inflation, that can be given free of gift or estate tax to a noncitizen spouse. ^{IRC §2523(i)}

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 trust qualifies for the unlimited marital deduction, and thus, no estate taxes due when the citizen spouse dies. ^{IRC 2056(d)}

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

• the surviving spouse is entitled to all trust income;
• the QDOT trust must be elected by the executor of the grantor's estate on the estate tax return.

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

• at least 1 of the trustees must be either a United States citizen or United States corporation (because they will, then, be subjected to U.S. laws);
  • so the noncitizen surviving spouse cannot be the sole trustee;
• the trust must comply with applicable IRS regulations, and provide a means of ensuring that estate taxes will eventually be paid, such as posting a bond or providing a letter of credit, if the trustee is an individual and if the QDOT trust principal is greater than the exemption amount.

Estate tax 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 trust.

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.