Qualified Domestic Trust (QDOT): Definition and How It Works

What Is a Qualified Domestic Trust (QDOT)?

A qualified domestic trust (QDOT) is a special kind of trust that allows taxpayers who survive a deceased spouse to take the marital deduction on estate taxes, even if the surviving spouse is not a U.S. citizen.

Normally, a U.S. citizen surviving spouse can take the marital deduction, but a non-citizen surviving spouse cannot. 

QDOTs, like QTIP trusts, only allow the marital deduction if assets are included inside the trust.

How a Qualified Domestic Trust (QDOT) Works

A qualified domestic trust allows a non-citizen surviving spouse of a deceased taxpayer to take full advantage of the marital deduction on estate tax for any assets that are placed into the trust before the death of the decedent.

This kind of trust is helpful for the non-citizen surviving spouse, who under standard tax laws, would not be eligible for the 100% marital deduction on estate tax.

As per the IRS, under Section 2056A, a surviving spouse is eligible for a 100% marital deduction of any estate taxes owed on assets. This means the surviving spouse pays no taxes on assets, with no limit. However, if the surviving spouse is not a U.S. citizen, the full marital deduction normally is not allowed.

In addition, a non-resident non-citizen cannot take advantage of the same estate tax exemption amount that applies individually or jointly to a U.S. citizen surviving spouse.

Forming a QDOT and putting all assets into the trust allows a non-citizen surviving spouse to take advantage of the marital deduction of 100% of estate taxes. It's also important to note that the surviving spouse can set up and fund the QDOT (if their spouse failed to) before the federal estate tax return is filed.

For surviving spouses who have not obtained U.S. citizenship for any reason, a QDOT is the best way to preserve marital assets. It is important to comply with all requirements and provisions of the trust for it to remain valid.

A QDOT only protects the assets of decedents who have died after November 10, 1998. In addition, at least one trustee of the QDOT must be a U.S. citizen or a domestic corporation authorized to retain estate tax. If all these conditions are met, forming a QDOT and placing marital assets into it can preserve assets for the surviving non-citizen spouse.

Limitations of a QDOT

Although a QDOT allows the qualifying non-citizen surviving spouse to take the marital deduction on assets inside the trust, it does not exempt the trust from paying the estate tax. It merely defers it until the death of the surviving non-citizen spouse.

At that time, the estate will be liable for Section 2056A estate taxes on all assets in the QDOT, whether or not there are surviving beneficiaries. This could reduce the value of the assets in the trust significantly for such beneficiaries.

The Bottom Line

A qualified domestic trust is a legal document that's created for the financial benefit of a surviving spouse who is a non-U.S. citizen who otherwise would not normally qualify for the full marital estate tax deduction.

The trust defers estate taxes that will be due once the surviving spouse passes away. One trustee of the QDOT must be a U.S. citizen or a domestic corporation authorized to retain estate tax.