Understanding Estate Taxes
14. Qualified domestic trust
If your spouse is not a U.S. citizen, you cannot do the same kind of tax planning we just discussed. That's because Uncle Sam is afraid your spouse will leave the country after you die and not pay any estate taxes.
This means that, when you die, if you don't plan ahead, everything in your estate over the amount of the estate tax exemption at that time will be taxed -- unless you have a Qualified Domestic Trust, QDOT for short.
Let's say that Bob's estate is $6 million and Sue is not a U.S. citizen. If the estate tax exemption when Bob dies is $5 million, that amount would typically stay in Bob's trust and the remaining $1 million would go into the QDOT. The assets in the QDOT will not be taxed until Sue dies, so the entire estate will be available to provide for her for as long as she lives.
Keep in mind that the QDOT, not Sue, owns the assets. But Sue can receive income from it and, with the trustee's approval, may also receive principal. To make sure estate taxes are paid when Sue dies, at least one trustee of the QDOT must be a U.S. citizen or a U.S. corporation.