Qualified Domestic Trust (QDOT)

A Qualified Domestic Trust (QDOT) is a specific type of trust that allows a non-U.S. citizen spouse to receive assets from a deceased spouse’s estate while deferring estate taxes. This trust is particularly relevant in the context of estate planning for couples where one spouse is not a U.S. citizen.

The primary purpose of a QDOT is to ensure that the non-citizen spouse can inherit assets without immediate taxation, which would otherwise be applicable under U.S. estate tax law. When a U.S. citizen passes away, their estate may be subject to federal estate taxes if the estate’s value exceeds a certain threshold. However, bequests to a surviving spouse are typically exempt from such taxes, provided the spouse is a U.S. citizen.

In cases where the surviving spouse is a non-citizen, this exemption does not apply unless the assets are placed into a QDOT. The trust must meet specific requirements set by the Internal Revenue Service (IRS):

1. Trustee Requirements: At least one trustee of the QDOT must be a U.S. citizen or a domestic corporation. This ensures that the trust is manageable under U.S. law.

2. Distribution Restrictions: The trust must provide that no distributions can be made to the non-citizen spouse unless they are either principal distributions or distributions of income. This allows the IRS to maintain control over the potential tax liability.

3. Taxation: Estate taxes are deferred until the non-citizen spouse’s death, at which point the assets in the QDOT may be subject to U.S. estate taxes.

For example, if a U.S. citizen spouse passes away and leaves a significant estate to their non-citizen spouse without the establishment of a QDOT, the entire value of the estate could be taxable immediately. However, by placing the assets into a Qualified Domestic Trust, the estate tax can be deferred until the non-citizen spouse passes away, at which time the estate will be taxed on the value of the trust assets.

In Texas, particularly in areas like Houston, it is common for couples with mixed citizenship to utilize QDOTs in their estate planning to ensure tax efficiency and compliance with both federal laws and personal financial goals. This makes a QDOT an important tool in the estate planning toolkit for those in similar situations.