157 / Does the transfer of a life insurance policy to an irrevocable trust for the benefit of the grantor’s spouse qualify for the gift tax marital deduction?

The gift tax marital deduction generally is not available for a gift in trust unless the donee spouse has at least the right to all the income from the property and a general power of appointment over the principal, or unless the donee spouse’s income interest is a “qualifying income interest for life” in the property transferred, in which case the donee spouse does not usually have to have a general power of appointment over the principal. Because a life insurance policy ordinarily does not produce income before maturity, the requirement that the donee spouse receive all the income for life will not be met unless the donee spouse has the power to compel the trustee to convert the policy to income-producing property, or the power to terminate the trust and demand the policy.¹ An annual exclusion may be allowed instead of the marital deduction if the donee spouse is not a U.S. citizen.

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1. Treas. Reg. §§ 25.2523(e)-1(f)(4), 25.2523(e)-1(f)(6).