Printer Friendly

Marital deduction.

660. May a trust intended to qualify for the marital deduction as a "power of appointment trust" authorize the trustee to retain or acquire life insurance policies?

Under a "power of appointment trust," the surviving spouse must be entitled for life to all the income (see Q 863). 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 will probably 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. (4)

661. May a trust intended to qualify for the marital deduction as "qualified terminable interest property" (QTIP) authorize the trustee to retain or acquire life insurance policies?

Under a "qualified terminable interest property (QTIP) trust," the surviving spouse must be entitled for life to all the income (see Q 863). 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 will probably 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 man rule" to treat the surviving spouse fairly by protecting the spouse's income interest. (5)

662. If a decedent directs his executor or a trustee to buy a nonrefund life annuity for his surviving spouse, will the annuity qualify for the marital deduction?

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 (see Q 863). (1) However, such an annuity will not fail to qualify if it is bought under a general investment power authorizing investments in both terminable interests and other property. (2)

663. Under what conditions 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 that will qualify: (1) proceeds payable in a lump sum to surviving spouse (regardless of whether contingent beneficiaries are named or whether the surviving spouse actually elects to receive the proceeds under a settlement option); (3) (2) proceeds payable solely to surviving spouse or to her estate (see Q 664); (3) proceeds payable to surviving spouse under a settlement option with contingent beneficiaries named, provided surviving spouse is given a general power of appointment over the proceeds (see Q 665, Q 666); (4) (unless otherwise elected by the decedent spouse's executor) proceeds of a survivor annuity where only the surviving spouse has the right to receive payments during such spouse's lifetime; (4) (5) (if executor elects to have proceeds qualify) proceeds held under the interest option for the surviving spouse for her lifetime, interest payable to her at least annually, no power in any person to appoint any of the proceeds to anyone other than the spouse during her lifetime. Arrangements (4) and (5) make the proceeds qualified terminable interest property (see Q 863); 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). (5) A specific portion must be determined on a fractional or percentage basis. (6) The proceeds will likewise qualify for the marital deduction if they are payable outright to the surviving spouse under insured's or annuitant's will or intestate laws, or to a trust that qualifies for the marital deduction (see Q 863). The marital deduction is not available unless the insured or annuitant is actually survived by his spouse, or is legally presumed to have been survived by his spouse (see Q 669, Q 863). Thus, a provision in the disposing instrument that the proceeds are payable to the spouse on the sole condition that she survive the insured or annuitant will not disqualify the proceeds (Q 667, Q 668).

A marital deduction is generally not allowable where the surviving spouse is not a United States citizen unless the transfer is to a qualified domestic trust (see Q 863).

664. Will the life insurance or annuity proceeds qualify for the marital deduction if they are payable to the surviving spouse under a settlement option with her estate designated as contingent beneficiary? If they are payable to her as a straight life annuity?

If the proceeds are payable only to the surviving spouse or her estate, they will qualify. (7) For example, the following settlement would qualify: life income to widow with 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. Or, interest to widow for life, and principal to her estate. 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). (8) If proceeds are payable under a no-refund life annuity to surviving spouse, qualification is not affected by the fact that an annuity is also payable to another, so long as their respective rights to their annuities are not tied together in any way. (1) Where 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 (see Q 863) unless otherwise elected by the decedent spouse's executor. (2)

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

Yes. Where 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. And, as a rule, terminable interests do not qualify for the marital deduction (see Q 863). 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 spouse, naming contingent beneficiaries to take after her 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, 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 her; (3) the spouse must have a general power of appointment over the proceeds (a power to appoint the proceeds to herself or to her estate-see Q 666); (4) the spouse's power to appoint must be exercisable by her alone and in all events, whether exercisable by will or during life; (5) the proceeds must not be subject to a power in any other person to appoint against the spouse. (3)

An alternative settlement naming contingent beneficiaries does not require that the spouse be given any power over the proceeds so long as she has a "qualifying income interest for life" in the proceeds, and so long as the executor elects to have such proceeds qualify for the marital deduction. The surviving spouse has a "qualifying income interest for life" if 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's death, and the spouse may be (but need not be) given the right to withdraw proceeds during her lifetime. See Q 663.

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. (4) However, a specific portion must be determined on a fractional or percentage basis. (5)

666. For purposes of the marital deduction, what constitutes a general power to appoint the proceeds of a life insurance policy?

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 to his estate. (6) Thus, if the widow-beneficiary has the power to revoke contingent beneficiaries and name her estate instead, she is deemed to have a general power to appoint to her estate. Or, if she can withdraw the principal sum for her own use, she is deemed to have a general power to appoint to herself. (1) She need not possess both powers; either will suffice. And the term "power to appoint" need not be used in the insurance policy. Thus, even where the widow is not given the power to revoke contingent beneficiaries, the proceeds will qualify if she is given the power to withdraw the proceeds during her life and the power is exercisable in all events. Insurance companies normally impose some administrative restrictions on the exercise of withdrawal rights. However, the regulations state that limitations of a formal nature-such as requirements that reasonable intervals must elapse between partial exercise-will not cause disqualification. (2)

667. Does the use of a "delay clause" disqualify life insurance proceeds for the marital deduction?

The "delay clause" will not disqualify the proceeds unless the delay period specified is for more than six months. For example, the beneficiary arrangement may provide that payment will be made to insured's wife if she is living at the end of 60 days after insured's death, otherwise to contingent beneficiaries.

Under the general rules, a delay clause would create a terminable interest and, accordingly, disqualify the proceeds. The reason for this is that such a clause creates a possibility that the surviving spouse's interest will end (if she dies within the delay period) and the contingent beneficiaries will receive the proceeds (see Q 863). Under a specific exception, however, such a clause will not disqualify the proceeds if: (1) the delay period does not exceed six months, and (2) the surviving spouse actually survives the delay period. However, any clause that creates the possibility that the surviving spouse may have to survive longer than six months to receive the proceeds will ordinarily disqualify them for the marital deduction-even though the spouse survives the period and actually receives the proceeds. (3)

668. Does a common disaster clause disqualify life insurance proceeds for the marital deduction?

Where a true common disaster clause is used, the beneficiary-spouse will not receive the proceeds if she dies of injuries sustained in the same accident (or other disaster) that causes the death of the insured-regardless of how long she actually survives the insured. A common disaster clause creates a terminable interest (see Q 863). 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 his spouse are actually caused by the same disaster. (4) A true common disaster clause is seldom used in an insurance policy.

669. Can operation of the Uniform Simultaneous Death Act result in loss of the marital deduction?

Yes. 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 beneficiary died first. Since it is presumed that the spouse-beneficiary did not survive, the Act would result in loss of the marital deduction. However, it is possible to reverse the statutory presumption by inserting in the policy a so-called "reverse simultaneous death clause." This clause would provide that, if the order of death cannot be determined, it will be presumed that the insured died first. This would save the marital deduction. (1) However, it cannot save the marital deduction if there is evidence that the beneficiary actually died first.

670. Can proceeds of community property life insurance passing to the surviving spouse qualify for the marital deduction?

Yes, and without limit as to amount (see Q 863). (2)

Planning Point: Although--because of the special exception--a delay clause does not always result in loss of the marital deduction, the clause should not be used when it is important to secure the marital deduction with respect to the proceeds for insured's estate. If the spouse does survive the delay period, the clause will have served no purpose. If she survives the insured, but does not survive the full delay period, the clause will cause loss of the marital deduction.

(4.) Treas. Regs. [subsection] 20.2056(b)-5(f)(4), 20.2056(b)-5(f)(5); Rev. Rul. 75-440, 1975-2 CB 372; Est. of Robinson v. U.S., 46 AFTR 2d [paragraph] 148,414 (E.D. Tenn. 1980).

(5.) TAM 8745003.

(1.) Treas. Reg. [section] 20.2056(b)-1(c)(2)(i).

(2.) IRC Sec. 2056(b)(1)(C); Treas. Reg. [section] 20.2056(b)-1(f).

(3.) Treas. Reg. [section] 20.2056(c)-2(b)(3)(ii).

(4.) IRC Sec. 2056(b)(7)(C).

(5.) IRC Sec. 2056(b)(7)(B)(ii).

(6.) IRC Sec. 2056(b)(10).

(7.) IRC Sec. 2056(a); Treas. Reg. [section] 20.2056(c)-2(b)(3).

(8.) Treas. Reg. [section] 20.2056(b)-1(g), Example (3).

(1.) Rev. Rul. 77-130, 1977-1 CB 289.

(2.) IRC Sec. 2056(b)(7)(C).

(3.) IRC Sec. 2056(b)(6); Treas. Reg. [section] 20.2056(b)-6; Est. ofWhite v. Comm., 22 TC 641 (1954); Est. ofZeman v. Comm., TC Memo 1958-68; Est. of Fiedler v. Comm., 67 TC 239 (1976), acq. 1977-1 CB 1; Rev. Rul. 76-404, 1976-2 CB 294.

(4.) IRC Secs. 2056(b)(6), 2056(b)(7); Treas. Reg. [section] 20.2056(b)-6(b).

(5.) IRC Sec. 2056(b)(10).

(6.) IRC Sec. 2056(b)(6).

(1.) Treas. Reg. [section] 20.2056(b)-6(e)(4); Rev. Rul. 55-277, 1955-1 CB 456.

(2.) Treas. Reg. [section] 20.2056(b)-5(g)(4). See also Est. of Cornwell v. Comm., 37 TC 688 (1962), acq. Est. of Jennings v. Comm., 39 TC 417 (1962), acq.

(3.) IRC Sec. 2056(b)(3); Treas. Reg. [section] 20.2056(b)-3(b); Rev. Rul. 54-121, 1954-1 CB 196; TAM 8747003; but see Eggleston v. Dudley, 257 F.2d 398 (3rd Cir.). See also Rev. Rul. 70-400, 1970-2 CB 196.

(4.) IRC Sec. 2056(b)(3).

(1.) Treas. Reg. [section] 20.2056(c)-2(e).

(2.) IRC Sec. 2056.
COPYRIGHT 2010 ALM Media, LLC
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2010 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:PART II: FEDERAL ESTATE TAX ON INSURANCE AND EMPLOYEE BENEFITS
Publication:Tax Facts on Insurance and Employee Benefits
Date:Jan 1, 2010
Words:2494
Previous Article:Life insurance trusts.
Next Article:Multiple-life life insurance.
Topics:

Terms of use | Privacy policy | Copyright © 2018 Farlex, Inc. | Feedback | For webmasters