Estate Planning for Non‑Citizen Spouses: Understanding Qualified Domestic Trusts (QDOTs)

In today’s global society, it’s increasingly common for a U.S. citizen to be married to a spouse who is not a U.S. citizen. While most estate planning rules assume both spouses are citizens, mixed‑citizenship couples face unique challenges. The unlimited marital deduction—a central feature of the U.S. estate tax system—does not apply automatically when assets pass to a non‑U.S. citizen spouse. To avoid immediate estate taxes on the first spouse’s death, careful planning is required. One widely used solution is the Qualified Domestic Trust (QDOT).

This article explains why non‑citizen spouses are treated differently, what a QDOT is, how it works, and alternative strategies for safeguarding your family’s wealth.

Why Citizenship Matters in Estate Tax Planning

Under U.S. tax law, married couples who are both citizens can transfer unlimited amounts to each other during life or at death tax‑free. This is known as the unlimited marital deduction, and it postpones estate taxes until the second spouse dies, allowing the surviving spouse full use of the couple’s combined assets.

For a spouse who is not a U.S. citizen, this benefit is not automatically available. Congress limits the marital deduction for non‑citizen spouses to prevent wealthy individuals from avoiding estate tax by transferring assets abroad. Without planning, assets left outright to a non‑citizen spouse may trigger federal estate tax on the first spouse’s death, reducing the amount available to the family.

What Is a Qualified Domestic Trust (QDOT)?

A Qualified Domestic Trust is an irrevocable trust designed to hold assets passing from a deceased spouse to a non‑citizen surviving spouse. When properly structured and elected on the estate tax return, a QDOT allows the estate to claim the marital deduction, deferring estate tax until distributions of principal are made or the surviving spouse dies. Key features include:

• U.S. Trustee Requirement: At least one trustee must be a U.S. citizen or a U.S. corporate trustee (such as a bank or trust company). This ensures the Internal Revenue Service (IRS) can collect estate tax when due.

• Principal Distributions Are Taxable: When the trust distributes principal to the surviving spouse (for example, for living expenses or large purchases), estate tax is generally due on the amount distributed. This effectively defers estate tax until the funds leave the trust.

• Income Distributions Are Exempt: The surviving spouse may receive all income from the QDOT (such as interest or dividends) without immediate estate tax. These distributions are subject to income tax but not estate tax.

• Election Requirement: The executor of the deceased spouse’s estate must make a QDOT election on the federal estate tax return (Form 706) within the filing deadline. Without this election, the trust will not qualify for the marital deduction.

• Security or Bond Requirement: If the trust’s assets exceed $2 million, the trustee must furnish a bank letter of credit or bond to assure payment of estate tax, unless the trustee is a domestic bank. For smaller QDOTs, a bond may still be required unless certain tangible U.S. real estate is held.

When the surviving spouse dies, the remaining assets in the QDOT are subject to estate tax as if they were part of the first spouse’s estate. Any tax paid on principal distributions during the spouse’s lifetime is credited against the tax due at the spouse’s death.

Planning Process and Considerations

1. Evaluate Your Family’s Citizenship and Residency

Your estate plan should begin by confirming the citizenship and residency status of both spouses. Permanent residents (green card holders) are still considered non‑citizens for estate tax purposes. If your spouse plans to naturalize, the timing may influence whether a QDOT is necessary.

2. Calculate Potential Estate Tax Exposure

Assess the value of your estate relative to the current federal estate tax exemption (for example, $13.99 million per person for 2025) and any applicable state estate or inheritance taxes. Remember that assets passing outright to a non‑citizen spouse do not qualify for the unlimited marital deduction. If your estate exceeds available exemptions, a QDOT or other strategy may be needed.

3. Draft the QDOT Document

A QDOT can be created during your lifetime or through your will or revocable trust. Key drafting elements include:

• Identification of a U.S. trustee to serve alongside or instead of your spouse. A corporate trustee provides continuity and familiarity with QDOT administration.

• Provisions for paying income to the surviving spouse and restricting principal distributions unless needed for a hardship or subject to estate tax.

• Instructions for paying estate tax when principal is distributed or at the spouse’s death.

• Clear definition of the trustee’s duties, investment powers, and accounting obligations to the IRS.

4. Fund the QDOT

Only assets passing to the non‑citizen spouse require placement in a QDOT. You may leave other assets to a trust for children or to the spouse outright. When funding the QDOT, consider the nature of the assets:

• Liquid assets like cash, securities, or business interests can provide income and flexibility for the surviving spouse.

• Real estate can be placed in a QDOT, but property located outside the U.S. may present administrative challenges. U.S. real estate used as a personal residence can sometimes be exempt from the bond requirement.

5. Make the QDOT Election

Your executor must affirmatively elect QDOT status by attaching a statement to Form 706 (federal estate tax return) describing the trust and stating the intention to claim the marital deduction through a QDOT. Without this election, the trust will not shield your estate from immediate estate tax.

6. Administer the Trust

After your death, the U.S. trustee must:

• File annual income tax returns for the trust (Form 1041) and ensure proper withholding on taxable distributions.

• Track principal and income separately. Distributions of principal may require payment of estate tax. The trustee must report and pay the tax (via Form 706‑QDT) within six months of a taxable event.

• Provide annual statements to the IRS detailing distributions and remaining assets.

7. Consider the Spouse’s Naturalization

If the non‑citizen spouse becomes a U.S. citizen after your death, special rules may allow the QDOT to terminate and distribute assets without further estate tax. To qualify, the surviving spouse must become a citizen and either have been a U.S. resident continuously since the first spouse’s death or file a separate estate tax return demonstrating the trust’s assets remain subject to U.S. estate tax.

Alternative Strategies

While a QDOT is often the most straightforward solution, other strategies can complement or replace a QDOT depending on your circumstances:

• Lifetime Gifts: You can make annual gifts to a non‑citizen spouse under the annual exclusion for non‑citizen spouses, which is higher than the standard annual gift exclusion (e.g., $185,000 per year in 2025, indexed for inflation). This allows you to transfer wealth gradually without using your lifetime exemption.

• Credit Shelter Trust (Bypass Trust): Leave up to your available estate tax exemption to a trust for your spouse and/or descendants. This trust is not counted in your spouse’s estate and can provide income and discretionary distributions.

• Outright Bequests to Children: If your spouse is financially independent, leaving assets directly to children or other beneficiaries may reduce the need for a QDOT. However, be mindful of spousal rights under state law.

• Joint Ownership Structuring: Titling certain assets jointly can ensure your spouse has access to them, but joint ownership does not avoid estate tax for non‑citizens.

• Insurance Solutions: Life insurance can provide liquidity to pay estate taxes due at either spouse’s death. Policies owned by an irrevocable life insurance trust (ILIT) can shield proceeds from estate tax.

• Citizenship Planning: Encourage or help your spouse pursue naturalization if feasible. Once a spouse becomes a U.S. citizen, the unlimited marital deduction applies, and the QDOT may no longer be necessary.

Working with Professionals

Estate planning for non‑citizen spouses requires coordination between tax, legal, and financial advisors. Key professionals include:

• Estate Planning Attorney: Drafts wills, trusts, and marital property agreements; ensures compliance with QDOT requirements; and coordinates with the executor.

• Tax Advisor: Models estate tax liabilities, prepares estate and trust tax returns, and advises on lifetime gifting strategies.

• Trustee: For QDOTs, choose a trustee familiar with NFA compliance, estate tax rules, and cross‑border considerations. Many families select a corporate trustee for this role due to the complexity.

• Immigration Attorney: If naturalization is part of the plan, an immigration attorney can guide the spouse through the process.

Practical Tips

1. Start planning early. Waiting until after one spouse’s death to think about citizenship or QDOTs can be costly and may limit your options. Discuss long‑term goals as a couple and engage professionals while you are both alive and well.

2. Keep good records. Document the value and location of assets, the citizenship status of each spouse, and the terms of any trusts or gifts. This helps the executor and trustee meet tax deadlines and make proper elections.

3. Update documents when circumstances change. A spouse’s naturalization, relocation abroad, significant changes in wealth, or new children may all warrant revisiting your estate plan.

4. Understand your state’s laws. Some states levy their own estate or inheritance taxes or have special rules for marital property. In community property states, you and your spouse may own an undivided one‑half interest in community property; only your half is subject to estate planning decisions.

Conclusion

Estate planning with a non‑citizen spouse involves navigating complex federal and state tax rules that differ from those for citizens. A properly structured Qualified Domestic Trust can preserve the marital deduction and delay estate taxes, ensuring your spouse is provided for. However, QDOTs come with administrative requirements and may not be appropriate for every situation. By understanding the rules, exploring alternatives, and consulting professionals, mixed‑citizenship couples can craft a plan that preserves assets, meets family goals, and complies with the law.