For many married couples, estate planning includes strategies that allow assets to pass to a surviving spouse without immediate estate tax consequences. Under federal law, this is typically accomplished through the unlimited marital deduction, which allows assets to transfer to a U.S. citizen spouse estate-tax free at death.
However, when a surviving spouse is not a U.S. citizen, the unlimited marital deduction does not apply automatically. This is where a Qualified Domestic Trust (QDOT) becomes an essential planning tool.
What Is a QDOT?
A Qualified Domestic Trust (QDOT) is a specialized trust designed to allow assets to pass to a non–U.S. citizen surviving spouse while deferring federal estate taxes that would otherwise be due at the first spouse’s death.
Without a QDOT, assets left outright to a non-citizen spouse may be immediately subject to federal estate tax, potentially resulting in a significant and avoidable tax liability. A properly structured QDOT preserves estate tax deferral while still providing financial support to the surviving spouse.
How a QDOT Works
A QDOT allows the estate of the first spouse to defer federal estate taxes by placing qualifying assets into a trust that meets specific Internal Revenue Code requirements. Key features include:
- Income distributions from the QDOT may be paid to the surviving spouse during their lifetime.
- Principal distributions are generally restricted and may trigger estate tax unless made for hardship reasons (as defined by IRS regulations).
- The trust must have at least one U.S. trustee, and additional security requirements may apply depending on the trust’s value.
- Federal estate tax is ultimately imposed upon the surviving spouse’s death or upon certain principal distributions.
In effect, a QDOT functions similarly to a marital trust for tax purposes, but with added safeguards to ensure eventual tax collection.
Why the Law Treats Non-Citizen Spouses Differently
The unlimited marital deduction is premised on the idea that assets passing to a U.S. citizen spouse will eventually be subject to U.S. estate taxation at that spouse’s death. When the surviving spouse is not a citizen, Congress created QDOT rules to prevent assets from leaving the U.S. estate tax system entirely.
Importantly, permanent residency (green card status) does not qualify as U.S. citizenship for purposes of the marital deduction. Citizenship status is the determining factor.
When You Might Need to Consider a QDOT
A QDOT may be appropriate if:
- One spouse is a U.S. citizen and the other is not at the time of death
- The estate value exceeds or may exceed the federal estate tax exemption
- You want to provide financial security for a non-citizen spouse while deferring estate taxes
- You have international family ties or anticipate changes in residency or citizenship status
In some cases, QDOT planning is included as a contingent strategy, activated only if the surviving spouse has not obtained U.S. citizenship by the time of the first spouse’s death.
What Happens If the Surviving Spouse Becomes a U.S. Citizen?
If the surviving spouse later becomes a U.S. citizen and meets certain residency requirements, the QDOT may no longer be necessary. Under the right circumstances, assets may qualify for the unlimited marital deduction, and the QDOT structure can potentially be terminated or restructured.
This makes proactive planning especially important for couples where citizenship status may change over time.
The Importance of Proper Drafting and Administration
QDOTs are highly technical trusts governed by federal tax law. If the trust does not strictly comply with IRS requirements, the intended tax benefits may be lost entirely.
Proper planning includes:
- Careful drafting of the trust language
- Coordination with overall estate and tax planning goals
- Ongoing compliance with trustee and reporting requirements
Because of their complexity, QDOTs should only be created with guidance from an experienced estate planning attorney.
A Qualified Domestic Trust can be a powerful and necessary tool for families with a non–U.S. citizen spouse. When properly implemented, it allows couples to preserve wealth, provide for a surviving spouse, and defer federal estate taxes that might otherwise be triggered immediately.
If you or your spouse are not U.S. citizens and estate taxes are a concern, we’re here to help. Contact our Intake Department at 760-448-2220 or visit us online at www.geigerlawoffice.com/contact.cfm. We proudly serve families across California from our offices in Carlsbad (San Diego County) and Laguna Niguel (Orange County).
