Before understanding the concept of a qualified domestic trust (QDOT), taxpayers must grasp the concept of “unlimited marital deduction.” Unlimited marital deduction allows all estate property to be transferred from one spouse to another without any gift or estate taxes being applied. This means that married couples can transfer unlimited amounts of property without paying any penalties, and there are no monetary limits on this property.  This also assumes, then, that the gift and estate taxes will be paid upon the death of the surviving spouse. Although unlimited marital deductions apply to most marriages, there are a few stipulations:

- The property must be transferred to a legal spouse.

- The surviving spouse may not be given any terminable interest property (for a better explanation of this term, visit the Living Trust Network Web site).

- Both spouses must be U.S. citizens.

Since the U.S. government needs to ensure that it will receive gift and estate taxes on property, it does not want a non-U.S. citizen to leave the country after receiving property from a deceased spouse without paying taxes on it. To protect both the spouse and the government, qualified domestic trusts (QDOT) became an option. A QDOT allows all estate property to be placed in the trust upon the death of a spouse, helping the surviving spouse delay gift and estate tax. Again, there are stipulations:

• One trustee must be a U.S. bank or a U.S. citizen; if more than two million dollars is in the trust, one trustee must be a U.S. bank.
• A binding QDOT election must be made by the executor of the estate within nine months of the date of death in order to qualify for the marital deduction on the federal estate tax return.
• No more than 35% of the trust’s value can be placed in real property outside of the U.S.; if more than two million dollars is in the trust, a U.S. bank must be a trustee, a U.S. bank must furnish a bond for 65% of the total asset value, and/or a U.S. trustee must furnish a binding letter of credit for 65% of the trust’s value.

This may appear to be a complicated process. The best way to ensure that your surviving spouse receives the marital deduction is to have him or her become a U.S. citizen. If this is not an option, gain further information regarding qualified domestic trusts by visiting the National Archives and Records Administration Web site, visiting the IRS Web site, or contacting a lawyer who specializes in estate planning.