What Is a Qualified Spousal Trust (QDOT)?

A Qualified Domestic Trust (QDOT) is an estate planning tool that allows assets left to a non-U.S. citizen spouse to qualify for the federal estate tax marital deduction. Its function is to defer, not eliminate, the estate tax. The trust holds assets for the surviving non-citizen spouse, ensuring the U.S. government can collect estate tax when assets are distributed or upon the surviving spouse’s death. This structure prevents assets from leaving the country and escaping U.S. taxation.

The Marital Deduction for Non-Citizen Spouses

Under federal tax law, a U.S. citizen can transfer an unlimited amount of assets to a surviving spouse who is also a U.S. citizen without incurring federal estate tax. This provision is the unlimited marital deduction, which treats the married couple as a single economic unit. The principle is that the tax is not forgiven but deferred; the assets will be subject to estate tax when the surviving citizen spouse dies.

This automatic deferral is not available when the surviving spouse is not a U.S. citizen. The government’s concern is that a non-citizen spouse could receive a large inheritance, leave the United States, and take the assets with them. If this happened, the assets would be outside the U.S. tax system, and the government would lose its ability to collect the deferred estate tax.

To address this risk, the Internal Revenue Code disallows the unlimited marital deduction for transfers to non-citizen spouses. Without a QDOT, any assets passed to a non-citizen spouse above the federal estate tax exemption—$13.99 million for an individual in 2025—would be subject to immediate taxation upon the first spouse’s death.

The Qualified Domestic Trust was created as the solution to this problem. It acts as a substitute for the standard marital deduction by placing the inherited assets into a trust. This structure ensures the Internal Revenue Service (IRS) maintains oversight and can collect the deferred tax in the future.

QDOT Qualification Requirements

For a trust to be recognized as a Qualified Domestic Trust, its governing document must adhere to requirements in the Internal Revenue Code. A primary requirement is the role of the trustee. The trust instrument must mandate that at least one trustee is a U.S. citizen or a U.S. domestic corporation, often referred to as the “U.S. Trustee.” This ensures a party with a legal presence in the United States is accountable to the IRS for the trust’s administration.

The U.S. Trustee must have the power to withhold estate tax from any distribution of the trust’s principal. This authority is an enforcement mechanism, allowing the trustee to pay the required tax directly to the IRS whenever a taxable event occurs. The trust document must explicitly grant this right to the U.S. Trustee.

To guarantee the collection of deferred estate tax, regulations impose security requirements that vary based on the value of the assets in the trust. If assets exceed $2 million, the trust must require that at least one trustee be a U.S. bank, or the U.S. Trustee must furnish a bond or letter of credit to the IRS. For trusts with assets of $2 million or less, these specific security arrangements are not necessary, provided that no more than 35% of the trust’s assets consist of real property located outside the United States.

Taxation of QDOT Distributions and Assets

Once a QDOT is established, its assets are subject to a unique tax regime based on the nature of distributions to the surviving non-citizen spouse. Distributions of income, such as interest, dividends, and rents, are not subject to the QDOT estate tax. The surviving spouse receives this income and pays regular income tax on it.

Distributions of principal, the underlying property of the trust, are treated differently. Any distribution of principal to the surviving spouse is a taxable event and is subject to the QDOT estate tax. The tax is calculated by determining the estate tax that would have been due on the first spouse’s estate if the distribution had been included in it. The U.S. Trustee is responsible for withholding and paying this tax.

An exception to this rule is for “hardship” distributions of principal. A distribution can be made from principal without tax if it is in response to an immediate and substantial financial need of the surviving spouse related to their health, maintenance, or support. This need cannot be met from other reasonably available sources, such as the spouse’s own assets.

The second major taxable event occurs upon the death of the surviving non-citizen spouse. At this point, the entire remaining value of the assets held within the QDOT becomes subject to federal estate tax. This final tax ensures that the wealth that was deferred from taxation is ultimately subject to the U.S. estate tax system.

Establishing the QDOT and Making the Election

A Qualified Domestic Trust can be created in a couple of ways. It can be established by the decedent through their will, creating what is known as a testamentary trust that comes into existence upon their death. Alternatively, if the decedent did not create a QDOT, the surviving non-citizen spouse can create one after the decedent’s death and transfer the inherited assets into it. This must be done before the estate tax return is filed.

Once the trust instrument is properly drafted and the assets are transferred to it, the executor of the deceased spouse’s estate must take a procedural step. The executor must formally elect to treat the trust as a QDOT on Schedule M of the U.S. Estate Tax Return, Form 706.

This election is irrevocable and must be made on a timely filed estate tax return. The executor signifies the election by listing the property passing to the QDOT on Schedule M and claiming the marital deduction. Without this election, the trust will not be treated as a QDOT, and the estate tax will be due immediately.

Trustee Reporting and Responsibilities

The U.S. Trustee of a Qualified Domestic Trust has ongoing administrative and reporting duties that continue as long as the trust is in operation. The primary responsibility is to ensure compliance with IRS filing requirements, which centers on Form 706-QDT, the U.S. Estate Tax Return for Qualified Domestic Trusts. This form is the mechanism for reporting taxable events and calculating the deferred estate tax due.

The filing deadline for Form 706-QDT depends on the event that triggers the tax. For taxable distributions of principal made during the surviving spouse’s lifetime, the form is due by April 15th of the year following the distribution. A final Form 706-QDT must be filed after the death of the surviving non-citizen spouse. This return, which is due nine months after the surviving spouse’s death, reports the fair market value of all property remaining in the trust and settles the final tax liability.