Qualified Domestic Trusts

A Qualified Domestic Trust (QDOT) is a tax-planning trust used to preserve the unlimited marital deduction in situations where the surviving spouse is not a US citizen. Otherwise, the estate of the first spouse to die would pay estate tax on assets left to the surviving spouse that exceed the applicable state or federal exclusion amounts. If assets in excess of the exclusion amount are placed in a QDOT, the tax on these assets will be deferred. A QDOT may be used to defer both state and federal estate taxes.

The surviving spouse may receive distributions of principal and income from the QDOT. Any income distributed is subject to income tax; distributions of principal are subject to state and federal estate taxes, unless the distribution qualifies as a hardship under the IRS regulations. After the death of the surviving spouse, any assets remaining in the QDOT are subject to state and federal estate taxes.

The unlimited marital deduction is not available when the surviving spouse is not a US citizen because of the possibility that assets will be removed to a foreign country, where they will no longer be subject to any US taxes in the future; it is a way to ensure that tax is paid before the assets are removed. Other rules governing QDOTs, such as requiring that at least one trustee be a US citizen or US corporation, are also in place for this purpose. However, deferring estate taxes with a QDOT helps to create a source of funds for the support of a surviving spouse. Moreover, if the surviving spouse becomes a US citizen after the death of his or her spouse, and other requirements are met, both the State of Washington and the federal government will permit the unlimited marital deduction for any remaining QDOT assets.

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