When a Spouse Is Not a U.S. Citizen: The Qualified Domestic Trust
The unlimited marital deduction is not available for property passing to a non-citizen spouse. A QDOT restores the deferral, at the price of a U.S. trustee, IRS oversight and a tax on principal distributions. Lifetime gifts and citizenship are the alternatives.
A married couple can usually defer all federal estate tax until the second death, because property passing to the surviving spouse qualifies for the unlimited marital deduction. That rule has an exception that catches many families in South Florida and other international communities. If the surviving spouse is not a United States citizen, the marital deduction is not allowed, no matter how long the couple has lived here or whether the spouse holds a green card.1
The concern behind the rule is simple. A citizen spouse will eventually face U.S. estate tax on what she inherits. A non-citizen spouse might leave the country with the property and never be taxed. Congress solved the problem with the qualified domestic trust, or QDOT.2
What a QDOT requires
Property that passes to a QDOT, rather than outright to the non-citizen spouse, qualifies for the marital deduction. The trust must meet the following conditions.3
- At least one trustee must be a U.S. citizen or a domestic corporation, and no distribution of principal may be made unless that trustee has the right to withhold the estate tax due on it.
- If the trust holds more than $2 million, either a U.S. bank must serve as trustee or the trustee must post a bond or letter of credit equal to 65 percent of the trust's value. Smaller trusts have a lighter requirement, which limits how much foreign real property they can hold.4
- The trust must otherwise qualify for the marital deduction, typically as a QTIP trust that pays all income to the spouse at least annually.
- The executor must elect QDOT treatment on the estate tax return.
The trust defers the tax. It does not eliminate it. Income distributed to the surviving spouse is free of the deferred estate tax. Distributions of principal are taxed as though they had been included in the first spouse's estate, and whatever remains at the surviving spouse's death is taxed the same way.5 There is a hardship exception for principal distributed to meet an immediate and substantial financial need relating to health, maintenance, education or support of the spouse or a dependent, where other reasonable resources are not available.6
Setting one up after the fact
A QDOT does not have to be in the Will. If the first spouse dies without one, the surviving spouse or the executor may create the trust and transfer the inherited property to it before the estate tax return is filed, and the transferred property will qualify.7 That rescue works only for property the spouse actually controls. Retirement accounts and annuities need a separate arrangement under which the spouse agrees to pay the deferred tax as the payments come in.8
The alternatives
- Citizenship. If the surviving spouse becomes a U.S. citizen before the estate tax return is filed, and was a resident at all times between the death and naturalization, the ordinary marital deduction is allowed and no QDOT is needed.9 A QDOT that is already in place can also be terminated once the spouse becomes a citizen.10
- Lifetime gifts. Gifts between spouses are ordinarily unlimited, but gifts to a non-citizen spouse are capped. The cap is $194,000 for 2026, and it is indexed.11 Steady annual gifts up to that amount move property over time without a trust, and without the deferred tax that eventually follows QDOT principal.
- Using the exemption. The first spouse's own $15 million basic exclusion amount shelters property left directly to the non-citizen spouse. For many couples that is enough, and the QDOT is a backstop for the excess.
- Life insurance and joint property. Jointly held property between a citizen and a non-citizen spouse does not get the usual half inclusion rule. The full value is included in the citizen's estate except to the extent the survivor can prove contribution.12 Title and contribution records matter.
The planning point
The marital deduction is the single largest estate tax benefit most families use, and a non-citizen spouse loses it by default. The fix is not expensive, but it has to be in the documents, the trustee has to be chosen with the U.S. trustee requirement in mind, and the couple should know where the citizenship and lifetime gift options sit. None of this requires a change in anyone's immigration status. It requires a plan that reflects the family as it actually is.
Notes
- IRC section 2056(d)(1). ↩
- IRC sections 2056(d)(2), 2056A. ↩
- IRC section 2056A(a); Treas. Reg. section 20.2056A-2. ↩
- Treas. Reg. section 20.2056A-2(d)(1). ↩
- IRC section 2056A(b)(1), (2). ↩
- IRC section 2056A(b)(3)(B); Treas. Reg. section 20.2056A-5(c). ↩
- IRC section 2056(d)(2)(B); Treas. Reg. section 20.2056A-4(b). ↩
- Treas. Reg. section 20.2056A-4(c). ↩
- IRC section 2056(d)(4). ↩
- IRC section 2056A(b)(12). ↩
- IRC section 2523(i); Rev. Proc. 2025-32 (2026 annual exclusion for gifts to a non-citizen spouse of $194,000). ↩
- IRC section 2040(a), (b); section 2056(d)(1)(B). ↩
Terry L. (T. L.) Turnipseed, J.D., LL.M., CTFA, is a tax, trust and estate attorney in Fort Lauderdale, Florida, and Head of Estate and Tax Planning at Alta Trust Company. He is a former tenured professor of law at Syracuse University. Reach him at tl@turnipseed.law or on LinkedIn. This article is general information, not legal advice.