138 / If an insured assigns a life insurance policy in which a spouse is the named beneficiary, will the full amount of the proceeds qualify for the marital deduction?

As a general rule, if a property interest passing to a surviving spouse is subject to an encumbrance, only the value of the property interest in excess of the amount of the encumbrance qualifies for the marital deduction.¹ If the debt that is secured by the policy is actually paid from estate assets, or if the spouse-beneficiary has a right of subrogation against the estate and the estate is solvent, the full amount of the proceeds qualifies for the marital deduction despite the collateral assignment.² (For a policy loan, see Q 187.)

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1.     IRC § 2056(b)(4)(B).

2.     Estate of Gwinn v. Commissioner, 25 TC 31 (1955), acq. 1956-1 CB 4; Wachovia Bank & Trust Co. v. U.S., 163 F. Supp. 832 (Ct. Cl. 1958); Treas. Reg. § 20.2056(b)-4(b).

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