Taxation of Estates and Gifts

Terminable Interest Rule

In general, if a surviving spouse gets an interest that will terminate or fail by the lapse of time or by the occurrence or non-occurrence of an event or contingency and a third party will possess it afterwards because of a transfer from the decedent, the deceased spouse's estate cannot take a marital deduction. 26 U.S.C. § 2056(b).

  • Basically, you can't deduct a life estate or term of years given to a spouse.

If the interest can only terminate within six months after the decedent's death and the termination does not occur, this is not considered an interest which will terminate or fail on the death of such spouse. 26 U.S.C. § 2056(b)(3).

  • This is made for simultaneous death provisions.
Life Estate with Power of Appointment in Surviving Spouse

LEPOA is an exception to the terminable interest rule for life estates laid out in 26 U.S.C. § 2056(b)(5). It has five requirements:

  1. The surviving spouse must be entitled to all the income from the interest for life.
  2. The income must be payable at least annually.
  3. The surviving spouse must have the power to appoint the entire interest to herself or her estate.
  4. The surviving spouse's power to appoint must be exercisable alone and in all events.
  5. Nobody has a power to appoint any part of the property to someone other than the surviving spouse.
Life Insurance or Annuity with Power of Appointment in Surviving Spouse

Life insurance or annuity with power of appointment in surviving spouse is essentially the same thing as a life estate with power of appointment in surviving spouse except obviously it is life insurance or an annuity instead. 26 U.S.C. § 2056(b)(6).

Qualified Terminable Interest Property

Qualified terminable interest property is property which passes from the decedent, in which the surviving spouse has a qualifying income interest for life, paid at least annually, and which is elected under 26 U.S.C. § 2044. 26 U.S.C. § 2056(b)(7).

Qualifying Income Interest for Life

The surviving spouse has a qualifying income interest for life if she's entitled to all the income from the property or has a usufruct and if no one can appoint anyone else. 26 U.S.C. § 2056(b)(7)(B)(ii).