Marital Deduction

<div class="Section1">Under a “power of appointment trust,” the surviving spouse must be entitled for life to all of the income. This condition contemplates a trust holding income-producing property. Thus, if the trustee is empowered to retain or acquire non-income-producing property (such as life insurance), the condition probably will not be satisfied unless the trustee is required to make payments to the surviving spouse out of other trust assets to replace the lost income, or unless the trust gives the surviving spouse the power to compel the trustee to convert the non-income-producing property to income-producing property.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Treas. Reg. §§ 20.2056(b)-5(f)(4), 20.2056(b)-5(f)(5); Rev. Rul. 75-440, 1975-2 CB 372; <em>Estate of Robinson v. U.S.</em>, 1980 US Dist. LEXIS 14673 (E.D. Tenn. 1980).<br /> <br /> </div>

<div class="Section1">No. The surviving spouse’s interest in the annuity is considered a non-deductible terminable interest even though no interest in the annuity has passed from the decedent to any other person.<a href="#_ftn1" name="_ftnref1">¹</a> Such an annuity will not fail to qualify, however, if it is bought under a general investment power authorizing investments in both terminable interests and other property.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Treas. Reg. § 20.2056(b)-1(c)(2)(i).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     IRC § 2056(b)(1)(C); Treas. Reg. § 20.2056(b)-1(f).<br /> <br /> </div>

<div class="Section1">Where a true common disaster clause is used, the beneficiary-spouse will not receive the proceeds if he or she dies of injuries sustained in the same accident (or other disaster) that causes the death of the insured, regardless of how long that spouse actually survives the insured. A common disaster clause creates a terminable interest. But as a special exception to the terminable interest rule, a clause will not disqualify the proceeds unless the death of the insured and that of the spouse actually are caused by the same disaster.<a href="#_ftn1" name="_ftnref1">¹</a> A true common disaster clause is seldom used in an insurance policy.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 2056(b)(3).<br /> <br /> </div>

<div class="Section1">For purposes of the marital deduction, the donee of a general power of appointment must have the power to appoint the property to himself or herself or to his or her estate.<a href="#_ftn1" name="_ftnref1">¹</a> Thus, if the surviving spouse-beneficiary has the power to revoke contingent beneficiaries and name his or her estate instead, the surviving spouse-beneficiary is deemed to have a general power to appoint to his or her estate. Or, if the surviving spouse-beneficiary can withdraw the principal sum for his or her own use, the surviving spouse-beneficiary is deemed to have a general power to appoint to himself or to herself or to his or her estate.<a href="#_ftn2" name="_ftnref2">²</a> The surviving spouse-beneficiary need not possess both powers; either will suffice. The term “power to appoint” need not be used in the insurance policy. Thus, even where the surviving spouse is not given the power to revoke contingent beneficiaries, the proceeds will qualify if the surviving spouse is given the power to withdraw the proceeds during his or her life and the power is exercisable <em>in all events</em>. Insurance companies normally impose some administrative restrictions on the exercise of withdrawal rights. Regulations state, however, that limitations of a formal nature – such as requirements that reasonable intervals must elapse between partial exercise – will not cause disqualification.<a href="#_ftn3" name="_ftnref3">³</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 2056(b)(6).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Treas. Reg. § 20.2056(b)-6(e)(4); Rev. Rul. 55-277, 1955-1 CB 456.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     Treas. Reg. § 20.2056(b)-5(g)(4). <em><em>See also</em> Estate of Cornwell v. Commissioner</em>, 37 TC 688 (1962); <em>Estate of Jennings v. Commissioner</em>, 39 TC 417 (1962).<br /> <br /> </div>

<div class="Section1">Yes, and without limit as to amount.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 2056.<br /> <br /> </div>

<div class="Section1">Under a qualified terminable interest property (QTIP) trust, the surviving spouse must be entitled for life to all the income. This condition contemplates a trust holding income-producing property. Thus, if the trustee is empowered to retain or acquire non-income-producing property (such as life insurance), the condition probably will not be satisfied unless the trust gives the surviving spouse the power to compel the trustee to convert the non-income-producing property to income-producing property, or unless the trustee is restrained under a state law “prudent person” rule to treat the surviving spouse fairly by protecting the spouse’s income interest.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     TAM 8745003.<br /> <br /> </div>

<div class="Section1"><br /> <br /> Yes.<br /> <br /> If the insured and spouse-beneficiary die under circumstances that make it impossible to determine the order of death (usually when both are killed in the same accident), the Uniform Simultaneous Death Act creates a presumption that the <em>beneficiary</em> died first. Because it is presumed that the spouse-beneficiary did <em>not</em> survive, the act would result in loss of the marital deduction. It is possible to reverse the statutory presumption, however, by inserting a so-called “reverse simultaneous death clause” in the policy. This clause provides that, if the order of death cannot be determined, it will be presumed that the insured died first. This would save the marital deduction.<a href="#_ftn1" name="_ftnref1">¹</a> It cannot save the marital deduction, however, if there is evidence that the beneficiary actually died first.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Treas. Reg. § 20.2056(c)-2(e).<br /> <br /> </div>

<div class="Section1"><br /> <br /> If the proceeds are payable only to the surviving spouse or to his or her estate, they will qualify.<a href="#_ftn1" name="_ftnref1">¹</a> For example, the following settlement would qualify: life income to a widow with a 20-year certain period, and should she die within the 20-year period, the balance of the guaranteed payments to be commuted and paid to her estate. The following settlement also would qualify: interest to widow for life, and principal to her estate at her death. Likewise, the proceeds will qualify if they are payable to the surviving spouse under a straight life annuity settlement with no refund or period-certain guarantee (no portion of the proceeds would be payable to any other person after her death).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> If proceeds are payable under a no-refund life annuity to the surviving spouse, qualification is not affected by the fact that an annuity also is payable to another, so long as the respective rights to their annuities are not tied together in any way.<a href="#_ftn3" name="_ftnref3">³</a> When only the surviving spouse has the right to receive payments from a survivor annuity during such spouse’s lifetime, such proceeds are treated as qualified terminable interest property unless otherwise elected by the decedent spouse’s executor.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 2056(a); Treas. Reg. § 20.2056(c)-2(b)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Treas. Reg. § 20.2056(b)-1(g), Example (3).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     Rev. Rul. 77-130, 1977-1 CB 289.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.     IRC § 2056(b)(7)(C).<br /> <br /> </div>

<div class="Section1"><br /> <br /> There are five basic arrangements for the payment of proceeds to the surviving spouse that will qualify for the marital deduction:<br /> <blockquote>(1)&nbsp;&nbsp;&nbsp;&nbsp; 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);<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> (2)&nbsp;&nbsp;&nbsp;&nbsp; proceeds payable solely to the surviving spouse or to the surviving spouse&rsquo;s estate ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="192">192</a>);<br /> <br /> (3)&nbsp;&nbsp;&nbsp;&nbsp; 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="193">193</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="194">194</a>);<br /> <br /> (4)&nbsp;&nbsp;&nbsp;&nbsp; proceeds of a survivor annuity where only the surviving spouse has the right to receive payments during such spouse&rsquo;s lifetime, unless otherwise elected by the decedent spouse&rsquo;s executor;<a href="#_ftn2" name="_ftnref2">²</a> and<br /> <br /> (5)&nbsp;&nbsp;&nbsp;&nbsp; proceeds held under the interest option for the surviving spouse for the surviving spouse&rsquo;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&rsquo;s lifetime &ndash; if the executor elects to have proceeds qualify.</blockquote><br /> Arrangements (4) and (5) make the proceeds qualified terminable interest property; however, to the extent provided in the regulations, an <em>annuity</em> 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).<a href="#_ftn3" name="_ftnref3">³</a> A specific portion must be determined on a fractional or percentage basis.<a href="#_ftn4" name="_ftnref4">⁴</a> The proceeds likewise will qualify for the marital deduction if they are payable outright to the surviving spouse under the insured&rsquo;s or the annuitant&rsquo;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 <a href="javascript:void(0)" class="accordion-cross-reference" id="197">197</a>). 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="195">195</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="196">196</a>).<br /> <br /> 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.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;20.2056(c)-2(b)(3)(ii).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;2056(b)(7)(C).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;2056(b)(7)(B)(ii).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;2056(b)(10).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes.<br /> <br /> When there is a possibility that one or more persons may receive some unpaid proceeds after the spouse&rsquo;s death, the spouse receives only a <em>terminable interest</em> 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.<br /> <br /> 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&rsquo;s death, and the proceeds will qualify, provided the settlement meets the following conditions:<br /> <blockquote>(1)&nbsp;&nbsp;&nbsp;&nbsp; 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&rsquo;s death;<br /> <br /> (2)&nbsp;&nbsp;&nbsp;&nbsp; All amounts payable during the spouse&rsquo;s life must be payable only to the spouse;<br /> <br /> (3)&nbsp;&nbsp;&nbsp;&nbsp; The spouse must have a <em>general power of appointment</em> over the proceeds (a power to appoint the proceeds to himself or herself or to his or her estate &ndash; <em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="194">194</a>);<br /> <br /> (4)&nbsp;&nbsp;&nbsp;&nbsp; The spouse&rsquo;s power to appoint must be exercisable by the spouse alone and in all events, whether exercisable by will or during life; and<br /> <br /> (5)&nbsp;&nbsp;&nbsp;&nbsp; The proceeds must not be subject to a power in any other person to appoint against the spouse.<a href="#_ftn1" name="_ftnref1">¹</a></blockquote><br /> An alternative settlement naming contingent beneficiaries does not require that the spouse be given any power over the proceeds so long as the spouse has a &ldquo;qualifying income interest for life&rdquo; in the proceeds, and so long as the executor elects to have such proceeds qualify for the marital deduction. The surviving spouse has a &ldquo;qualifying income interest for life&rdquo; if he or she is entitled to all the income from the proceeds, payable annually or more frequently, and no person has a power to appoint any part of the proceeds to any person other than the surviving spouse. The insured or anyone else, including the surviving spouse, can designate beneficiaries to receive proceeds remaining at the spouse&rsquo;s death, and the spouse may be (but need not be) given the right to withdraw proceeds during his or her lifetime ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="191">191</a>).<br /> <br /> It is not necessary that the entire proceeds qualify. If a specific portion of the proceeds meets the conditions outlined above, that specific portion will qualify for the deduction.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The specific portion, however, must be determined on a fractional or percentage basis.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;2056(b)(6); Treas. Reg. &sect;&nbsp;20.2056(b)-6; <em>Estate of White v. Commissioner</em>, 22 TC 641 (1954); <em>Estate of Zeman v. Commissioner</em>, TC Memo 1958-68; <em>Estate of Fiedler v. Commissioner</em>, 67 TC 239 (1976), acq. 1977-1 CB 1; Rev. Rul. 76-404, 1976-2 CB 294.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&sect;&nbsp;2056(b)(6), 2056(b)(7); Treas. Reg. &sect;&nbsp;20.2056(b)-6(b).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;2056(b)(10).<br /> <br /> </div></div><br />