One of the most valuable benefits of estate planning is the unlimited marital deduction, which allows married couples to transfer assets to each other without incurring federal estate or gift taxes. So, if one spouse passes away, the surviving spouse can inherit assets without facing immediate tax consequences. However, what many people do not realize is that this benefit only applies if both spouses are U.S. citizens. This limitation can understandably frustrate non-citizen spouses, who are otherwise subject to significant estate tax burdens. Fortunately, a Qualified Domestic Trust (QDOT) may be the ideal alternative.

While it is important to sit down with an estate planning attorney to discuss your unique needs, a QDOT could offer a way to preserve the marital deduction and defer estate taxes while still protecting the surviving non-citizen spouse.

Let us explore this concept more in today’s blog post.

The Challenge for Non-Citizen Spouses

The 2025 annual exclusion for gifts to non-citizen spouses is $190,000. Simply put, this means that if you pass away and leave more assets than the exclusion to your non-citizen spouse, those assets beyond the exclusion could be subject to estate taxes. In many cases, those estate taxes could reach 40% unless proper planning is in place.

This is where a Qualified Domestic Trust (QDOT) can help. A QDOT is a special type of trust that holds assets for a non-citizen spouse and ensures that the assets qualify for the marital deduction. 

However, it is important to note that while a QDOT defers estate taxes, it does not eliminate them. 

The taxes are due when the surviving spouse passes away or when certain distributions are made from the trust. 

Here are a few additional requirements for a valid QDOT:

  1. Trustee requirements — At least one trustee must be a U.S. citizen or a U.S. domestic corporation.
  2. Distribution restrictions — The trust must prohibit distributions of principal to the surviving spouse unless the U.S. trustee has the right to withhold estate taxes on those distributions.
  3. Security measures — If the value of the QDOT exceeds $2 million, the trustee must either be a U.S. bank or post a bond equal to 65% of the fair market value of the property transferred to the trust.
  4. Election requirements — The executor of the deceased spouse’s estate must make an irrevocable QDOT election on the estate tax return (Form 706).

Distributions From a QDOT

Another item of note is that while the surviving spouse can receive income from the QDOT without incurring immediate estate taxes, principal distributions are subject to estate taxes unless they qualify as hardship distributions. These are made in response to an immediate and substantial financial need related to the spouse’s health, maintenance, education, or support. 

If the surviving spouse becomes a U.S. citizen before the deceased spouse’s estate tax return is due, the assets in the QDOT may qualify for the unlimited marital deduction as though they were transferred directly to the surviving spouse.

Portability and QDOTs

Portability simply means that it allows a surviving spouse to use the deceased spouse’s unused estate tax exemption. However, if the deceased spouse was a non-U.S. domiciliary, portability does not apply unless a tax treaty permits it. 

Even if portability is not available, a QDOT can still be a valuable tool for estate planning.

The bottom line is that non-citizen spouses have options when it comes to their unique estate planning journey. A QDOT can provide significant tax benefits and ensure that your spouse is taken care of after your passing. That said, it requires careful consideration and a strategic approach that you can only get from an estate planning attorney. 

It is essential to work with experienced professionals to navigate the complexities of QDOTs and other estate planning tools. 

Call Leigh Hilton PLLC Today!!

Having a competent attorney in your corner will help you and your family navigate the often overwhelming waters of protecting everything you own and everyone you love. That is our job, and we do it better than anyone else. Call Leigh Hilton PLLC so that we can help ensure you and your family are taken care of in the best way possible. 

Leigh Hilton PLLC wants to be your first call every time for any estate planning need. We look forward to serving you.

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