QDOTs offer estate planning benefits for non-citizen spouses

United States federal estate and gift taxes apply to the worldwide assets of U.S. citizens and non-citizens who are domiciled in the U.S. (“U.S. donors”), as well as certain U.S. assets of “non-resident aliens.” These taxes are imposed at rates of up to 40% and may be due when a gift is made or at a person’s death.

The good news is that there is a substantial exclusion available for U.S. donors which allows certain transfers to anyone to be free of these taxes. In addition, between U.S. citizen spouses (each a “U.S. spouse”), there is a “marital deduction” that allows certain unlimited transfers between them on a tax-deferred basis. Therefore, when a gift is made or the donor spouse passes away, there are no transfer tax consequences until the death of the donee or surviving spouse. For U.S. donors with non-citizen spouses (“non-U.S. spouses”), this deduction is not available for lifetime transfers and carries additional restrictions with respect to transfers at death.

Frequently, advisors recommend the use of trusts as estate planning vehicles to best utilize exemptions, exclusions and deductions and maximize the transfer of wealth to future generations. Do trusts also work when both spouses are not U.S. citizens? In general, the answer is yes.

Basic exclusion basics

For 2026, the federal “basic exclusion amount” available to U.S. donors for gift and estate tax purposes is $15 million. This exclusion applies to total taxable transfers during life and at death by a donor to all donees, regardless of the donee’s citizenship. This means that a U.S. spouse can transfer up to $15 million to their non-U.S. spouse free of any U.S. gift or estate taxation, outright or in trust. Consideration should be given to whether it is preferable to make lifetime transfers, save the exclusion for use at the first death, or allow it to pass to the surviving spouse for use upon their later death, if circumstances permit.

Gift tax annual exclusion - augmented

In addition to the lifetime exclusion amount, donors have the benefit of an “annual exclusion amount” ($19,000 in 2026 and periodically adjusted for inflation), which permits transfers free of gift tax on a “per donee” basis for transfers by the donor to anyone each year.

Because the unlimited gift tax marital deduction is not available for lifetime transfers to non-U.S. spouses, U.S. federal transfer tax laws instead provide for a greater annual exclusion amount for these marital gifts, as long as the gift would have qualified for the marital deduction if the spouse were a citizen. This means that outright gifts to a non-U.S. spouse would qualify for this exclusion, which for 2026 is $194,000. Whether a gift in trust qualifies is a fact-specific determination, and transfers to QTIP trusts (discussed below) will not qualify.

Estate tax unlimited marital deduction – with limitations

While both outright transfers and transfers to certain trusts for the benefit of a U.S. spouse would qualify for the unlimited estate tax marital deduction, outright transfers to non-U.S. spouses do not qualify. The only way to make use of the marital deduction is through a Qualified Domestic Trust (“QDOT”).

QTIPs, QDOTs and conditions on qualification

Certain requirements must be met for transfers in trust to qualify for the marital deduction, even for a U.S. spouse beneficiary. The most frequently used type of trust is the “qualified terminable interest property” (or “QTIP”) trust. It provides for all net income to be paid to or for the benefit of the spouse, with or without the ability to pay principal to the spouse during their lifetime. The spouse must be the sole current beneficiary. Upon the death of the spouse, estate tax is paid (usually from the trust property) and the remaining trust assets are distributed to the remainder beneficiaries. The QDOT is essentially a QTIP with added protections to ensure payment of the deferred U.S. estate tax, enabling it to qualify for the estate tax marital deduction. Should the non-U.S. spouse later become a U.S. citizen and meet the applicable requirements, the additional QDOT provisions will no longer apply and the trust will be treated as an ordinary QTIP.

Complex considerations – simple solution

One of the protections required in a QDOT is the direction that principal distributions to the spouse be subject to withholding for payment of estate tax (unless the distribution qualifies for a hardship exception).

QDOT assets are considered “tax-inclusive,” meaning that when funds from the QDOT are used to pay tax, those funds are themselves subject to tax. Since the estate tax is payable from the assets of the trust, a QDOT trustee is required to perform advanced calculations to ensure the proper withholding. Corporate fiduciaries possess the specialization and expertise to administer trusts with enhanced administrative responsibilities.

Federal law imposes personal liability on trustees of a QDOT for the payment of tax. For trusts greater than $2 million in value, if no U.S. corporate trustee is acting, the law requires the individual trustee to post a bond or obtain a letter of credit in favor of the U.S. Treasury Department equal to 65% of the trust’s fair market value to secure payment of the eventual estate tax. This requirement is usually impractical and adds complexity to the administration of the trust. U.S. corporate fiduciaries are exempt from this bond requirement.

Where a marital trust (QDOT or QTIP) forms part of an estate plan, other trusts are also typically put in place to provide continuity of asset administration, ensure the planned transfer of wealth from one generation to the next, protect assets from creditors and maximize tax planning. Sophisticated planning may be enhanced by the engagement of sophisticated fiduciaries.

 

 

Please note that this article addresses only federal estate and gift taxes, and not income, generation-skipping transfer or individual state or non-U.S. estate or inheritance taxes. Anyone considering a QDOT or other estate planning vehicle should consult with a qualified tax advisor. The rules are complex and require expert advice.