Legal Definitions - Qualified domestic trust

A Qualified Domestic Trust (QDOT) is a specialized type of trust established for the benefit of a surviving spouse who is not a U.S. citizen. Its primary purpose is to allow the estate of the deceased U.S. citizen spouse to qualify for the federal estate taxmarital deduction.

Normally, when a U.S. citizen dies and leaves assets to their surviving spouse, those assets are exempt from federal estate tax through an unlimited marital deduction. However, this unlimited deduction is generally not available if the surviving spouse is not a U.S. citizen. A QDOT provides an exception, enabling the deceased spouse's estate to defer estate taxes on assets transferred to the non-citizen spouse. The assets are held within the QDOT, and estate taxes are typically paid only when the non-citizen spouse dies, or when assets are distributed from the trust during their lifetime (other than certain income distributions).

• Scenario 1: Providing for a Non-Citizen Spouse with Substantial Assets

  Example: Sarah, a U.S. citizen, is married to David, a citizen of the UK. Sarah has a significant estate, including a family home, investments, and retirement accounts. She wants to ensure David is fully provided for after her death without her estate being immediately burdened by federal estate taxes. If Sarah simply left all her assets directly to David, her estate would likely face substantial estate taxes because David is not a U.S. citizen.

  How it illustrates QDOT: By establishing a QDOT in her will or a separate trust document, Sarah can direct her assets into this trust for David's benefit. This allows her estate to claim the marital deduction, deferring the estate tax until David's death or until assets are distributed from the QDOT. This ensures David has access to the necessary funds and assets without immediate tax implications for Sarah's estate.

• Scenario 2: Protecting a Family Business for Future Generations

  Example: Michael, a U.S. citizen, owns a successful manufacturing business that he intends to pass down to his children from a previous marriage. However, he is currently married to Elena, a non-U.S. citizen, and wants to ensure she is financially secure for the rest of her life. The business represents a large portion of his estate's value.

  How it illustrates QDOT: Michael can establish a QDOT to hold the business assets (or a portion of them) for Elena's benefit. This allows his estate to qualify for the marital deduction, preventing the immediate sale of the business to pay estate taxes. The QDOT can be structured to provide Elena with income and support while preserving the principal of the business assets. Upon Elena's death, the remaining assets in the QDOT can then pass to Michael's children, with any deferred estate taxes becoming due at that time, ensuring both Elena's security and the eventual transfer of the business to the next generation.

• Scenario 3: International Couple with Real Estate Holdings

  Example: Maria, a U.S. citizen, and her husband, Carlos, a citizen of Spain, own several rental properties in the U.S. and a vacation home abroad. Maria wants Carlos to inherit these properties and continue managing them after her passing, but she is concerned about the immediate tax burden on her estate due to Carlos's non-U.S. citizenship.

  How it illustrates QDOT: Maria can establish a QDOT to receive her share of the U.S. real estate properties. This structure allows her estate to claim the marital deduction, deferring federal estate taxes on these valuable assets. Carlos can then manage the properties and receive income from the QDOT. The QDOT ensures that the properties remain in the family's control without being forced into a sale to cover immediate estate taxes, providing Carlos with the resources and time to manage the portfolio effectively.