191 / When will life insurance or annuity proceeds payable to the surviving spouse qualify for the marital deduction?

There are five basic arrangements for the payment of proceeds to the surviving spouse that will qualify for the marital deduction:

(1)     proceeds payable in a lump sum to the surviving spouse (regardless of whether contingent beneficiaries are named or whether the surviving spouse actually elects to receive the proceeds under a settlement option);¹

(2)     proceeds payable solely to the surviving spouse or to the surviving spouse’s estate ( Q 192);

(3)     proceeds payable to the surviving spouse under a settlement option with contingent beneficiaries named, provided the surviving spouse is given a general power of appointment over the proceeds ( Q 193, Q 194);

(4)     proceeds of a survivor annuity where only the surviving spouse has the right to receive payments during such spouse’s lifetime, unless otherwise elected by the decedent spouse’s executor;² and

(5)     proceeds held under the interest option for the surviving spouse for the surviving spouse’s lifetime, when interest is payable to the surviving spouse at least annually, and there is no power in any person to appoint any of the proceeds to anyone other than the spouse during the surviving spouse’s lifetime – if the executor elects to have proceeds qualify.

Arrangements (4) and (5) make the proceeds qualified terminable interest property; however, to the extent provided in the regulations, an annuity interest is to be treated in a manner similar to an income interest in property (regardless of whether the property from which the annuity is payable can be separately identified).³ A specific portion must be determined on a fractional or percentage basis.⁴ The proceeds likewise will qualify for the marital deduction if they are payable outright to the surviving spouse under the insured’s or the annuitant’s will or intestate laws, or to a trust that qualifies for the marital deduction. The marital deduction is not available unless the insured or annuitant is actually survived by his or her spouse, or is legally presumed to have been survived by his or her spouse ( Q 197). Thus, a provision in the disposing instrument that the proceeds are payable to the spouse on the sole condition that the spouse survive the insured or annuitant will not disqualify the proceeds ( Q 195, Q 196).

A marital deduction generally is not allowable when the surviving spouse is not a U.S. citizen unless the transfer is to a qualified domestic trust.