QDOTs and cross‑border couples: estate planning for US/UK marriages 

In our previous article on US/UK estate taxes and mixed marriages we looked at the application of the US-UK Estate Tax Treaty (the Treaty) to couples with one US spouse and one UK spouse, and the complex rules they face when it comes to estate planning.  

Differences in how each jurisdiction treats marital transfers, combined with restrictions on tax relief for non‑citizen spouses, mean that traditional tax planning tools often do not work as expected. In this article we discuss how Qualified Domestic Trusts (QDOTs), used alongside the Treaty, can be used to minimise exposure to US estate tax.  

The problem 

On the first death, if the US citizen spouse dies leaving assets to a non‑US citizen spouse, the US unlimited marital deduction is not available. While the US estate tax exemption (currently $15 million in 2026) may be used, any value above that threshold is exposed to US estate tax (up to 40%) at that point. There will be no UK inheritance provided that the spouse exemption is available in full.  

On the second death, when the UK surviving spouse dies, their estate may be subject to both UK inheritance tax if they are a ‘Long‑Term Resident’ and also US estate tax, although by virtue of the Treaty this is limited to certain US situated assets such as real estate and shares in US corporations. However, as a non‑US citizen, they will only have access to a significantly reduced US estate tax exemption of $60,000. 

The problem therefore arises that US estate tax may be paid on the first death, whereas UK inheritance tax (and any US estate tax) arises only on the second death. As a result, treaty relief is unlikely to be available to mitigate double taxation, meaning the same assets can effectively be taxed twice. 

If proper planning is in place, such as a QDOT, the double tax charge may be avoided.  

What is a QDOT and why is it useful  

A QDOT is a US estate planning mechanism which is designed to preserve the marital deduction when the surviving spouse is not a US citizen, deferring the estate tax charge until the death of the surviving, non-US-citizen spouse. If the assets in an estate are above $15 million (or whatever the exemption may be at the date of death), a QDOT will be invaluable where a US spouse dies first, and the couple hold US assets. The use of a QDOT means that no US estate tax charge will arise on the first death, and when it arises on the death of the second spouse to die, Treaty relief should be available to prevent a double tax charge of IHT and estate tax.  

A QDOT operates where the assets of the first spouse to die, if a US citizen, will pass into a US trust, thereby deferring estate tax until either capital is distributed from the trust, or the surviving spouse dies. The QDOT provides income to the survivor whilst postponing the tax charge. On the first death, the executors of an estate can elect for a trust to be treated as a QDOT if the strict conditions under Internal Revenue Code §2056A are met.  

The conditions were set out in our previous article, and are as follows:  

• the trust must have one trustee who is a US citizen or a domestic US corporation 

• if the trust assets exceed $2million, then one trustee must be either a US bank or trust corporation  

• the trustee must be empowered to withhold estate tax on any distribution of capital to the non-US citizen surviving spouse 

• no more than 35% of the trust’s assets may consist of foreign property unless the trust meets the bank-trustee or bonding requirements  

• the trust must be governed by the law of a US state.  

When the surviving spouse later dies, both UK inheritance tax and US estate tax will arise, and the Treaty may be available to mitigate the double taxation.   

How can the Treaty provide further help  

In certain circumstances, the Treaty may reduce or eliminate US estate tax exposure for individuals who are ‘Long Term Resident’ in the UK and treated as non‑resident aliens for US tax purposes. 

Although we noted above that the Treaty operates so that the exposure of a non-US citizen to estate tax is limited to certain US assets, the estate tax exemption is also very limited. Article 8(5) of the Treaty provides an important exception for UK individuals who were not US citizens or US domiciled (as defined in the Treaty). The personal representatives can elect for the individual to be treated as US-domiciled at the moment of death. The benefit of this election is the estate becomes entitled to the full US estate tax exemption, instead of the $60,000 allowance.   

In practice, this means that when a QDOT is set up for a non-US-citizen spouse, and the surviving non-US spouse’s estate elects under the Treaty to be treated as US‑domiciled for estate tax purposes, relief equivalent to two US estate tax exemptions can apply on the second death. The $15m exemption from the first spouse (locked inside the QDOT) is still available, and the $15m exemption for the surviving spouse – now treated as US‑domiciled under the Treaty – also applies.  

The election results in the surviving non-UK spouse’s worldwide assets being brought within the scope of estate tax (rather than just US land, for example) but if the total value of the QDOT assets and the surviving spouse’s estate does not exceed US$30m no estate tax should arise. 

How we can help 

If you are in a mixed US/UK marriage and the US spouse’s estate is close to exceeding or exceeds the estate tax exemption, we would recommend that you review the QDOT option as this could be advantageous for your estate and tax planning  

The Birketts specialist US UK team can assist clients with transatlantic estate planning and the use of trusts. Please get in touch if you would like to discuss this further.