What is a Qualified Domestic Trust (QDOT)?

A QDOT trust provides any couple with one or more non-US citizens with an opportunity to delay estate taxes on their property if they wish to provide for their non-citizen spouse after their death. The IRS allows for a US citizen to transfer all of his assets, tax free, to his spouse, if that spouse is an American citizen. When dealing with a non-citizen spouse, this exemption is not available. Instead, the citizen spouse can use his estate tax exemption ($3.5 million in 2009) to transfer property free of charge to his non-citizen spouse, but any property above the estate tax exemption is subject to estate taxes.

How does a QDOT work?

A QDOT works by placing the property above the estate tax exemption into a trust which then pays income to the non-citizen spouse for the rest of her life. The non-citizen spouse can also draw from the principle of the trust to pay for “hardship” expenses (medical bills, maintenance, education), without paying taxes. If the principle is withdrawn to pay for other things (vacations, etc.), estate tax is assessed upon withdrawal. When the non-citizen spouse dies, the property in the trust passes to the grantor’s heirs, and estate taxes are assessed.

Rules for QDOT:

There are multiple requirements that must be met for a QDOT trust to be recognized by the IRS. For example, at least one trustee of a QDOT must be a U.S. citizen or corporation. The rules which govern QDOTs can be complicated and must be followed closely to avoid paying large taxes. There are also rules which provide an incentive for the non-citizen spouse to become a citizen and receive the entire value of the trust tax free. Therefore, it is best to discuss this type of trust with your attorney.