Qualified Domestic Trust (QDOT): definition and procedures

What is a qualified domestic trust (QDOT)? A qualified domestic trust (QDOT) is a special type of trust that allows taxpayers who are survived by a spouse to take advantage of the marital inheritance tax deduction even if the surviving spouse is not a U.S. citizen.

The U.S. citizen surviving spouse can usually take advantage of the marital deduction, but it is not available to a non-citizen surviving spouse. QDOT, like QTIP trusts, allows a marital deduction if the assets are held within the trust.

Main Findings

The qualified domestic trust (QDOT) allows surviving non-U.S. citizen spouses to take the full marital deduction for inheritance taxes. If you are married to a citizen of another country, it makes sense to set up and fund a QDOT. Placing assets in a legal instrument such as a QDOT provides protection for the surviving non-U.S. citizen spouse.

As with any trust fund, it is important to fulfill all requirements and conditions in order for QDOT to remain in effect.

How a qualified domestic trust fund (QDOT)

works

A qualified domestic trust allows the non-citizen surviving spouse of a deceased taxpayer to take full advantage of the marital inheritance tax deduction for assets placed in the trust prior to the deceased's death. This type of trust is useful for a non-citizen surviving spouse who, under standard tax laws, is generally not entitled to a 100% marital deduction for inheritance tax.

According to the IRS, under Section 2056A, a surviving spouse is entitled to a 100% marital deduction for inheritance tax on all assets. This means that the surviving spouse does not pay taxes on the assets without limitation. However, if the surviving spouse is not a U.S. citizen, the full marital deduction is generally not allowed. In addition, a non-citizen resident cannot take advantage of the same inheritance tax deduction amount that applies individually or jointly to a U.S. civilian surviving spouse.

Creating a QDOT and placing all assets in a trust allows a non-civilian surviving spouse to take advantage of the marital deduction for 100% of the inheritance tax. It is important to note that a surviving spouse can create and fund a QDOT (if their spouse did not) before filing a federal inheritance tax return. For surviving spouses who do not have U.S. citizenship for any reason, QDOT is the best way to preserve marital assets. It is important to follow all the requirements and terms of the trust to keep it valid.

QDOT protects the assets of deceased persons

QDOT protects the assets of deceased persons who died after November 10, 1998.

In addition, at least one QDOT trustee must be a U.S. citizen or a domestic authority authorized to withhold inheritance tax. If all of these conditions are met, creating a QDOT and placing marital assets in it can preserve assets for the surviving noncitizen spouse. Assets not included in a trust will not qualify for the marital deduction and will be subject to inheritance taxes.

While QDOT

Limitations.

Although QDOT allows a qualified non-citizen surviving spouse to take a marital deduction for assets within the trust, it does not exempt the trust from inheritance taxes. The tax is deferred until the death of the surviving noncitizen spouse. At that time, the estate will be required to pay inheritance tax under Section 2056A on all assets to QDOT, regardless of whether there are surviving beneficiaries. This can significantly reduce the value of the assets in the trust for these beneficiaries.

Why is a qualified home trust important?

A qualified domestic trust can be very important in terms of the financial future of the surviving non-U.S. citizen spouse because it allows the spouse to take a marital deduction equal to 100% of the inheritance tax. Without this, the spouse cannot take the full amount of the deduction.

Who can create a qualified domestic trust?

A person who has assets to protect his or her noncitizen spouse can create one. It can also be created by his or her surviving spouse, provided the trust is funded before the deceased taxpayer's federal inheritance tax return is filed.

For more information, contact a reputable probate lawyer.

Does a qualified domestic trust eliminate inheritance tax?

No, it simply defers it until the death of the surviving spouse.

The qualified domestic trust is a legal document created for the financial benefit of a surviving non-U.S. citizen spouse who normally would not have been entitled to the full marital deduction for inheritance tax. The trust postpones the payment of inheritance taxes that will be levied upon the death of the surviving spouse. One of the QDOT trustees must be a U.S. citizen or a domestic authority authorized to withhold inheritance tax.