Qualified Domestic Trust (QDOT) in 2025: Australian Guide to US Estate Planning

For Australians with financial or family ties to the United States, estate planning can be a minefield—especially when it comes to managing cross-border inheritances. One structure that’s vital for these situations is the Qualified Domestic Trust (QDOT). As US estate tax laws evolve in 2025, understanding how QDOTs work, and when they’re necessary, could save your family significant money and stress.

What is a Qualified Domestic Trust (QDOT)?

A QDOT is a special type of trust created under US law to allow a non-US citizen surviving spouse to qualify for the marital deduction from US federal estate tax. Normally, when a US citizen dies, assets left to a spouse are exempt from estate tax—unless the surviving spouse isn’t a US citizen. That’s where a QDOT steps in, allowing the estate to defer or reduce US estate taxes and ensuring the surviving spouse isn’t hit with a massive tax bill.

• Key feature: QDOTs are essential when the deceased spouse is a US citizen or resident, but the surviving spouse is not.
• Legal requirement: QDOTs must meet strict IRS guidelines, including trustee requirements and annual filings.
• 2025 update: The US estate tax exemption is now indexed at $13.61 million, but cross-border families must plan carefully as legislative changes loom.

Why QDOTs Matter for Australians in 2025

With thousands of Australians holding US citizenship or green cards, or marrying Americans, QDOTs have become an increasingly relevant part of wealth transfer strategies. In 2025, the US estate tax exemption remains high, but proposals to reduce it are gaining traction in Congress. For Australians inheriting from US spouses, not having a QDOT in place could result in estate taxes of up to 40% on assets above the exemption threshold.

Consider this real-world scenario: An Australian citizen married to a US citizen inherits a Sydney property and a US investment portfolio. Without a QDOT, the IRS could tax any US-situs assets above the exemption at the highest rate. A QDOT allows assets to be held in trust, deferring estate tax until distributions or the spouse’s death—and in some cases, dramatically reducing the ultimate tax paid.

• Australian tax overlay: Australian beneficiaries also need to consider capital gains tax rules, as Australia doesn’t have an estate tax but does tax capital gains on inherited assets in some situations.
• Currency and reporting: With stricter global tax reporting in 2025, keeping QDOT assets compliant in both the US and Australia requires robust record-keeping and cross-border advice.

How to Set Up and Manage a QDOT

Setting up a QDOT is not a DIY project. The IRS mandates that at least one trustee must be a US citizen or US corporation (such as a bank or trust company), and the trust must include language ensuring the IRS can collect estate tax from the trust assets if necessary. Annual filings and careful documentation are required, especially as regulatory scrutiny intensifies in 2025.

1. Choose trustees carefully: At least one US-based trustee is mandatory. Many families opt for a professional trust company to ensure compliance.
2. Draft the trust agreement: The trust must be established by the deceased’s will or by the executor before the estate tax return is due (usually nine months after death).
3. File IRS forms: The QDOT must be reported on IRS Form 706 and managed in accordance with all QDOT-specific requirements.
4. Plan for distributions: Only income distributions are tax-free to the surviving spouse. Principal distributions trigger estate tax unless they meet hardship criteria.

Recent US-Australia information sharing agreements mean both countries’ tax authorities can scrutinise cross-border estates, so proper legal and tax guidance is essential at every step.

Potential Pitfalls and Planning Tips

QDOTs are powerful, but missteps can be costly. Common traps include failing to appoint a US trustee, missing IRS deadlines, or misunderstanding the interplay between US and Australian tax law. In 2025, with estate tax policy under review in the US, flexibility in your planning is more important than ever.

• Review your estate plan regularly—especially if you or your spouse’s citizenship or residency changes.
• Document all trust activity for both US and Australian tax reporting.
• Explore insurance or gifting strategies to complement QDOT planning, as estate tax exemptions may decrease in coming years.

For Australian families with US ties, a QDOT isn’t just a technical requirement—it’s often the key to preserving family wealth across generations and borders.