Federal Estate and Gift Tax Facts for Non-Us Citizens

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Qualified Domestic Trusts for non-U.S. citizen spouse

A Qualified Domestic Trust (QDOT) is a statutorily created trust designed to allow a surviving spouse, who is not a U.S. citizen, to qualify for the unlimited marital deduction. The intent of the QDOT legislation is to preserve the marital deduction to ensure that a noncitizen spouse does not leave the United States with assets inherited without paying federal estate tax on those assets. Having a QDOT currently is the only way a non-citizen spouse can inherit assets from the deceased spouse and use the marital deduction. The QDOT has many rules and it is restricted. The law requires qualified domestic trusts to contain certain features. A trust must:

- The executor must elect on the estate tax return to treat the trust as a QDOT.

- Every distribution of principal from the QDOT to the surviving spouse during her lifetime or at her death will be subject to payment of estate tax, and this tax is computed as if the distributions were included and taxed in the first spouse's estate.

- The terms of a QDOT should provide that all income is distributable to the surviving non-citizen spouse.

- The trustee of the QDOT must be a citizen of the United States.

- If the QDOT assets exceed $2 million, then one of the trustees must be a U.S. bank, and if there is an individual trustee, he or she must post a bond or letter of credit to the IRS in the amount of 65 percent of the value of the trust assets to secure payment of the tax.

- If the trust assets are under $2 million, then no bond need be posted and a U.S. bank need not be a trustee, provided that no more than 35 percent of the trust assets consists of real estate located outside the U.S.

Even though you can preserve the marital deduction with a QDOT, non-citizen spouses are still at a big disadvantage. In general, the taxes are delayed until the surviving spouse dies.

When the non-citizen spouse dies, assets remaining in the QDOT will also be taxed as if they had been included in the citizen spouse’s estate. That means the non-citizen spouse can’t shelter the QDOT assets from estate tax by using his or her own estate tax exemption.