What is a QDOT and Do I Need One?

A Qualified Domestic Trust, or “QDOT” is a Trust specifically authorized by statute to defer estate taxes for non-citizen spouses, but not every non-citizen spouse needs a QDOT.

Basically, every citizen and resident alien has a (currently) $13.99 million estate tax exemption, and a decedent can leave that amount to anyone without any issues. That exemption is currently set to cut in half at the end of this year; if the combined estate is under the limit for an individual, there’s no need for a QDOT.

If the estate is over that limit, a married decedent can normally transfer an unlimited amount to their spouse without paying any tax at that time. And when the surviving spouse passes away, thanks to DSUE, aka portability, a married couple essentially gets to double the exemption, so for a typical couple the first $27.98 million is not taxed.

However, that only applies if the surviving spouse is a citizen. If the surviving spouse is not a citizen, the decedent can transfer up to the exemption estate-tax free, but everything over that is taxable. So if the decedent had a $20 million estate, that can all go to a citizen-spouse without paying any estate tax, but if the surviving spouse is a citizen, $6 million would be taxed… and there would not be any portability. Taking it one step further, if the surviving spouse was worth $5 million, their combined estate would be worth $25 million, all of which would pass along free of the estate tax, but for a non-citizen spouse, if a resident, the surviving spouse would pay estate tax on that $6 million (approximately $2.5 million), and would then have a net worth of $22.5 million, and would pay tax on the $8.5 million over the exemption, or approximately $3.5 million. So yay, a noncitizen resident alien spouse would pay $6 million in estate tax that a citizen spouse would not have had to pay. (for non-resident aliens the situation is worse – see below).

The solution to that problem is a QDOT. If the decedent instead of leaving assets to the spouse left it into a QDOT, there’s no estate tax at the time of the decedent’s death – the tax is deferred until the funds are distributed out of the Trust, either to the noncitizen spouse or to the ultimate beneficiaries after the spouse passes away.

The lifetime exemption allows any citizen or resident alien to transfer up to $13.99 million to anyone.  However, a nonresident alien who has assets in the U.S. only gets a $60,000 exemption, and needs to pay estate tax on any assets over that limit.  An innovative use of the QDOT is to defer the estate tax that a non-resident alien would have to pay on their estate – and can be used for any spouse, citizen, lawful resident, or non-resident alien!