A Qualified Domestic Trust (QDOT) is a trust that allows a surviving non-U.S. citizen taxpayer to take the marital deduction on estate taxes. Normally, estates worth $11.58 million or less enjoy a lifetime estate tax exemption. Below that threshold, estate taxes do not apply. For married couples, the exemption is doubled to $23.16 million, and taxes only apply when the second spouse dies. This is the Unlimited Marital Deduction. It only applies, however, when the surviving spouse is a U.S. citizen.
The relatively high estate tax exemption means that most people will not need to worry about the estate tax. However, for those that do, the QDOT allows a non-U.S. citizen to take advantage of the Unlimited Marital Deduction. To make it work, a spouse will transfer certain assets into a QDOT trust. When they pass away, taxes on the estate will be deferred until either (a) distributions are paid out or (b) the surviving spouse passes away.
Why is a QDOT Necessary?
The reason this is necessary is policy. The purpose of the Unlimited Marital Deduction is to not avoid taxes altogether. Rather, it is to postpone taxes until the second death between the spouses. If the marital deduction were allowed for property left to a non-citizen, then there is risk that the surviving spouse would leave the United States and take the assets with them. If the spouse left to a country without a treaty allowing the U.S. to go after the assets, then the U.S. might lose out on those taxes.
Notably, Section 2056A of the Internal Revenue Code allows for assets to be transferred to the QDOT after the death of the first spouse. It must, however, be transferred within 9 months of the date of death (or within 15 months if granted an extension). And a QDOT election must be made on line 3 of Schedule M of the United States Estate Tax Return (Form 706). There are other rules that apply as well, such as who can be a trustee.
The rules and regulations related to forming and maintaining a QDOT are complicated and strict. If you have questions about or wish to form a QDOT, contact Signature Law for a free consultation.