A Qualifying Domestic Trust, or QDOT, allows taxpayers who are not U.S. citizens to claim the marital deduction for estate tax purposes, while keeping the property in trust for other future contingent beneficiaries. A non-citizen spouse is not otherwise eligible for the marital deduction. QDOTs can be used when trust assets would likely be subject to the federal estate tax (married couple with taxable estate greater than $5 million), without the marital deduction otherwise being available. Otherwise, without a QDOT, the surviving spouse must become a U.S. citizen before her deceased spouse’s estate tax return is filed.
QDOT Requirements. The following requirements must be met in order for the marital deduction to be allowable for a transfer to a non-citizen spouse:
- One Trustee must be either a U.S. citizen or a domestic corporation that is authorized to retain estate tax out of the trust assets.
- No distribution can be made from the trust, except for income, unless the trustee who is a U.S. citizen or domestic corporation has the right to withhold estate taxes from the distribution.
- The Trust must meet withholding and collection regulations.
- The executor must elect on the estate tax return to treat the trust as a QDOT.
- Thereafter, the Form 706-QDT should be filed annually to report distributions from the trust.
- The law imposes certain security requirements (e.g., posted bond) to ensure the payment of the estate tax. These requirements are dependent upon the size of the estate, who the domestic trustee is, and to what extent the trust property is located within the United States.
Distributions of Income. When income is distributed from the QDOT to the surviving spouse, it will be subject to income taxation, but not estate tax.
Distributions of Principal. When principal is distributed from the QDOT to the surviving spouse it will be subject to estate tax, unless made for hardship reasons. A distribution of principal is treated as made on account of hardship if the distribution is made to the spouse from the QDOT in response to an immediate and substantial financial need relating to the spouse’s health, maintenance, education, or support, or the health, maintenance, education, or support of any person that the surviving spouse is legally obligated to support. A distribution is not treated as made on account of hardship if the amount distributed may be obtained from other sources that are reasonably available to the surviving spouse. Such distributions must be reported on the 706-QDT.
On death of survivor. After the death of the surviving spouse (who was a non-citizen) the remaining QDOT assets will be subject to estate tax as though they were in the estate of the first spouse to die. Such assets will not be included in the survivor’s estate.
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