193 / Can life insurance settlements naming the spouse as primary beneficiary and other persons as contingent beneficiaries be arranged so that the proceeds qualify for the marital deduction?

Yes.

When there is a possibility that one or more persons may receive some unpaid proceeds after the spouse’s death, the spouse receives only a terminable interest in the proceeds. As a rule, terminable interests do not qualify for the marital deduction. As an exception to the general rule, however, a settlement naming contingent beneficiaries will qualify if the spouse is given a general power of appointment over the proceeds and certain other requirements are met.

Specifically, an insured may elect an interest-only, life income, or installment option for his or her spouse, naming contingent beneficiaries to receive the proceeds after the spouse’s death, and the proceeds will qualify, provided the settlement meets the following conditions:

(1)     The interest or installments must be payable annually or more frequently, and the first payment must be payable no later than 13 months after the insured’s death;

(2)     All amounts payable during the spouse’s life must be payable only to the spouse;

(3)     The spouse must have a general power of appointment over the proceeds (a power to appoint the proceeds to himself or herself or to his or her estate – see Q 194);

(4)     The spouse’s power to appoint must be exercisable by the spouse alone and in all events, whether exercisable by will or during life; and

(5)     The proceeds must not be subject to a power in any other person to appoint against the spouse.¹