Legal Definitions - QDOT

QDOT stands for Qualified Domestic Trust.

A QDOT is a specialized type of trust used in estate planning when a U.S. citizen spouse dies and leaves assets to a surviving spouse who is not a U.S. citizen. Normally, when a U.S. citizen leaves assets to their U.S. citizen spouse, those assets are exempt from federal estate tax due to an unlimited "marital deduction." However, this unlimited deduction generally does not apply if the surviving spouse is not a U.S. citizen.

The purpose of a QDOT is to allow the deceased U.S. citizen's estate to still qualify for this unlimited marital deduction. Assets transferred into a QDOT for the benefit of the non-U.S. citizen surviving spouse defer the federal estate tax until the surviving spouse's death or when the assets are distributed from the trust. This mechanism ensures that the estate of the first spouse to die is not immediately subject to federal estate tax, preserving the inheritance for the non-citizen spouse.

• Example 1: Maria, a U.S. citizen, is married to Carlos, who is a citizen of Spain and holds a green card in the U.S. When Maria passes away, her will leaves her entire multi-million dollar estate to Carlos. Without a QDOT, Maria's estate would likely face significant federal estate taxes immediately because Carlos is not a U.S. citizen. By establishing a QDOT in her estate plan, Maria ensures that her assets transferred to Carlos are placed into this trust, allowing her estate to claim the unlimited marital deduction and defer the federal estate tax until Carlos's death or when the trust distributes its principal.

• Example 2: David, a U.S. citizen, and his wife, Elena, a citizen of Italy, have built a successful business together. As part of their comprehensive estate planning, their attorney advises them to include provisions for a QDOT. This proactive step ensures that if David were to pass away first, the substantial assets he leaves to Elena, including his share of the business, would be transferred into the QDOT. This arrangement prevents David's estate from incurring immediate federal estate tax liability, preserving the full value of the inheritance for Elena's benefit while she is alive.

• Example 3: Sarah, a U.S. citizen, passed away, leaving her considerable assets to her husband, Omar, a citizen of Canada. Her estate plan included a QDOT. The assets, including their family home and investment portfolio, were transferred into this trust for Omar's benefit. This allowed Sarah's estate to utilize the marital deduction, meaning no federal estate tax was due at the time of her death. Instead, the estate tax liability will be postponed until Omar's passing, or if he withdraws principal from the trust for non-qualified purposes, ensuring the assets remain available to support him throughout his lifetime without immediate tax burden.