In U.S. estate law, the unlimited marital deduction allows assets to pass from one spouse to another without estate tax implications. However, this deduction only applies if the surviving spouse is a U.S. citizen. In the case of the surviving spouse not being a U.S. citizen, the unlimited marital deduction is unavailable, which means the non-citizen surviving spouse may face estate taxes on inherited assets. Currently, the estate tax ranges from 18% to 40%.
To address this significant financial burden, U.S. citizens married to non-citizens can establish a Qualified Domestic Trust (QDOT). This trust allows assets to be transferred to the non-citizen spouse while deferring U.S. estate taxes until the spouse withdraws funds from the trust or passes away. The QDOT can reduce the immediate tax burden on the surviving non-citizen spouse and facilitate a more strategic transfer of wealth.
How A Qualified Domestic Trust (QDOT) Works
Estate Tax Deferral: When a QDOT is established, estate taxes on transferred assets are deferred until the non-citizen spouse either withdraws funds from the trust or passes away. At that point, estate taxes apply to any distributions or remaining assets in the QDOT.
Eligibility Requirement: For a QDOT to be effective, it must meet specific IRS requirements, including that at least one trustee be a U.S. citizen or domestic corporation. This trustee is responsible for withholding estate taxes on any distributions made to the non-citizen spouse.
Limitations: It is important to note that a QDOT merely defers estate taxes and does not eliminate them. For example, if the non-citizen spouse makes withdrawals from the trust, the distributions may trigger estate taxes at the time of withdrawal.
Benefits Of A Qualified Domestic Trust (QDOT)
Federal Estate Tax Deferral: A QDOT allows non-U.S. citizen spouses to benefit from the marital deduction, which is usually only available to U.S. citizen spouses. A QDOT defers estate taxes on assets transferred to a non-citizen spouse until they either withdraw funds from the trust or pass away. This deferral can alleviate immediate tax burdens and provide the non-citizen spouse with greater financial flexibility.
Asset Preservation: By placing assets into a QDOT, the principal remains protected within the trust. This structure is especially beneficial for preserving high-value assets, such as real estate, family businesses, or other long-term investments.
These benefits make a QDOT an essential estate planning tool for U.S. citizens with non-citizen spouses, helping preserve the family’s wealth and providing a clean transfer of assets across spouses. At Urban Thier & Federer, we specialize in helping clients navigate complex international estate planning issues. For Clients with non-citizen spouses or beneficiaries, we can help determine whether establishing a Qualified Domestic Trust or other planning tools are best suited to achieve your estate goals.