More on the QDOT

A Qualified Domestic Trust (QDOT) is a special marital trust that enables a non-citizen surviving spouse to take advantage of the marital deduction. The marital deduction is not available for the non-citizen surviving spouse unless the assets distributed to that spouse pass into a QDOT. If the surviving spouse decides not to make the QDOT election, he or she may avoid estate taxes by becoming a U.S. citizen before filing Form 706.

The regulations for creating a QDOT are flexible. The first to die is not the only person who can create the trust. The surviving spouse, the surviving spouse’s representative, or the estate executor may also create the trust at the death of the first to die (§20.2056A-2).

The QDOT may defer estate taxes until the surviving spouse’s death. Since these assets become part of the surviving spouse's estate, that spouse will pay estate taxes on the assets unless they are disposed of before death. However, any of the following events may trigger estate taxes:

Death of surviving spouse
Distributions of principle other than income
Termination of trust’s QDOT status §2056A(b)

If the QDOT pays estate tax from one of the events shown above, the payment is considered a taxable distribution and is subject to an additional estate tax.

There are also some items that are excluded from estate taxes, including the following:

Distributions of income (subject to income tax, not estate tax)
Distributions to surviving spouse experiencing hardship
Some Transfers
Expenses of Trust
Assets Acquired from the Trust at Fair Market Value

While the QDOT is in existence, the beneficiary must file the 1041 Fiduciary Income Tax Return. The due date for this form is no later than the 15th day of the 4th month after the trust’s year end.

The provisions for the QDOT are as follows:

It must have at least one U.S. trustee. That trustee must be a U.S. citizen or a domestic corporation.
No distribution other than income may be made from the trust unless the trustee has the power to withhold or take out funds equal to estate or gift taxes imposed on the trust.
The trust provisions must insure proper provisions for tax collection as provided for in Treasury Regulations.
The QDOT election is made on the decedent’s estate tax return.

If the assets passing into the QDOT are greater than $2 million, at least one trustee must be a corporate trustee, such as a bank or trust company. If there is no corporate trustee, the trustee must furnish a bond that equals 65% of the fair market value of the trust's value. This bond insures that there will be enough to cover estate tax payments at the termination of the trust (Reg. 20.2056A-2(d)(1)(i)).

If the assets passing into the QDOT are less than $2 million, these requirements can be avoided if no more than 35% of the assets in the trust is invested in real property located outside of the United States.