(a) In general. Section 2056(b) provides that no marital deduction
is allowed with respect to certain property interests, referred to
generally as "terminable interests", passing from a decedent to his
surviving spouse. The phrase "terminable interest" is defined in
paragraph (b) of this section. However, the fact that an interest in
property passing to a decedent's surviving spouse is a "terminable
interest" makes it nondeductible only (1) under the circumstances
described in paragraph (c) of this section, and (2) if it does not come
within one of the exceptions referred to in paragraph (d) of this
section.
(b) Terminable interests. A "terminable interest" in property is
an interest which will terminate or fail on the lapse of time or on the
occurrence or the failure to occur of some contingency. Life estates,
terms for years, annuities, patents, and copyrights are therefore
terminable interests. However, a bond, note, or similar contractual
obligation, the discharge of which would not have the effect of an
annuity or a term for years, is not a terminable interest.
(c) Nondeductible terminable interests.
(1) A property interest which constitutes a terminable interest, as defined in paragraph (b) of
this section, is nondeductible if--
(i) Another interest in the same property passed from the decedent
to some other person for less than an adequate and full consideration in
money or money's worth, and
(ii) By reason of its passing, the other person or his heirs or
assigns may possess or enjoy any part of the property after the
termination or failure of the spouse's interest.
(2) Even though a property interest which constitutes a terminable
interest is not nondeductible by reason of the rules stated in
subparagraph (1) of this paragraph, such an interest is nondeductible if--
(i) The decedent has directed his executor or a trustee to acquire
such an interest for the decedent's surviving spouse (see further
paragraph (f) of this section), or
(ii) Such an interest passing to the decedent's surviving spouse may
be satisfied out of a group of assets which includes a nondeductible
interest (see further Sec. 20.2056(b)-2. In this case, however, full
nondeductibility may not result.
(d) Exceptions. A property interest passing to a decedent's
surviving spouse is deductible (if it is not otherwise disqualified
under Sec. 20.2056(a)-2) even though it is a terminable interest, and
even though an interest therein passed from the decedent to another
person, if it is a terminable interest only because--
(1) It is conditioned on the spouse's surviving for a limited
period, in the manner described in Sec. 20.2056(b)-3;
(2) It is a right to income for life with a general power of
appointment, meeting the requirements set forth in Sec. 20.2056(b)-5;
(3) It consists of life insurance or annuity payments held by the
insurer with a general power of appointment in the spouse, meeting the
requirements set forth in Sec. 20.2056(b)-6;
(4) It is qualified terminable interest property, meeting the
requirements set forth in Sec. 20.2056(b)-7; or
(5) It is an interest in a qualified charitable remainder trust in
which the spouse is the only noncharitable beneficiary, meeting the
requirements set forth in Sec. 20.2056(b)-8.
(e) Miscellaneous principles.
(1) In determining whether an interest passed from the decedent to some other person, it is immaterial whether
interests in the same property passed to the decedent's spouse and
another person at the same time, or under the same instrument.
(2) In determining whether an interest in the same property passed
from the decedent both to his surviving spouse and to some other person,
a distinction is to be drawn between "property", as such term is used
in section 2056, and an "interest in property". The term "property"
refers to the underlying property in which various interests exist; each
such interest is not for this purpose to be considered as "property".
(3) Whether or not an interest is nondeductible because it is a
terminable interest is to be determined by reference to the property
interests which actually passed from the decedent. Subsequent
conversions of the property are immaterial for this purpose. Thus, where
a decedent bequeathed his estate to his wife for life with remainder to
his children, the interest which passed to his wife is a nondeductible
interest, even though the wife agrees with the children to take a
fractional share of the estate in fee in lieu of the life interest in
the whole, or sells the life estate for cash, or acquires the remainder
interest of the children either by purchase or gift.
(4) The terms passed from the decedent, passed from the decedent to
his surviving spouse and passed from the decedent to a person other than
his surviving spouse are defined in Secs. 20.2056(c)-1 through
20.2056(c)-3.
(f) Direction to acquire a terminable interest. No marital deduction
is allowed with respect to a property interest which a decedent directs
his executor or a trustee to covert after his death into a terminable
interest for his surviving spouse. The marital deduction is not allowed
even though no interest in the property subject to the terminable
interest passes to another person and even though the interest would
otherwise come within the exceptions described in Secs. 20.2056(b)-5 and
20.2056(b)-6(relating to life estates and life insurance and annuity payments with
powers of appointment). However, a general investment power, authorizing
investments in both terminable interests and other property, is not a
direction to invest in a terminable interest.
(g) Examples. The application of this section may be illustrated by
the following examples. In each example, it is assumed that the executor
made no election under section 2056(b)(7) (even if under the specific
facts the election would have been available), that any property
interest passing from the decedent to a person other than the surviving
spouse passed for less than full and adequate consideration in money or
money's worth, and that section 2056(b)(8) is inapplicable.
Example (1). H (the decedent) devised real property to W (his
surviving wife) for life, with remainder to A and his heirs. The
interest which passed from H to W is a nondeductible interest since it
will terminate upon her death and A (or his heirs or assigns) will
thereafter possess or enjoy the property.
Example (2). H bequeathed the residue of his estate in trust for the
benefit of W and A. The trust income is to be paid to W for life, and
upon her death the corpus is to be distributed to A or his issue.
However, if A should die without issue, leaving W surviving, the corpus
is then to be distributed to W. The interest which passed from H to W is
a nondeductible interest since it will terminate in the event of her
death if A or his issue survive, and A or his issue will thereafter
possess or enjoy the property.
Example (3). H during his lifetime purchased an annuity contract
providing for payments to himself for life and then to W for life if she
should survive him. Upon the death of the survivor of H and W, the
excess, if any, of the cost of the contract over the annuity payments
theretofore made was to be refunded to A. The interest which passed from
H to W is a nondeductible interest since A may possess or enjoy a part
of the property following the termination of the interest of W. If,
however, the contract provided for no refund upon the death of the
survivor of H and W, or provided that any refund was to go to the estate
of the survivor, then the interest which passed from H to W is (to the
extent it is included in H's gross estate) a deductible interest.
Example (4). H, in contemplation of death, transferred a residence
to A for life with remainder to W provided W survives A, but if W
predeceases A, the property is to pass to B and his heirs. If it is
assumed that H died during A's lifetime, and the value of the residence
was included in determining the value of his gross estate, the interest
which passed from H to W is a nondeductible interest since it will
terminate if W predeceases A and the property will thereafter be
possessed or enjoyed by B (or his heirs or assigns). This result is not
affected by B's assignment of his interest during H's lifetime, whether
made in favor of W or another person, since the term "assigns" (as
used in section 2056(b)(1)(B)) includes such an assignee. However, if it
is assumed that A predeceased H, the interest of B in the property was
extinguished, and, viewed as of the time of the subsequent death of H,
the interest which passed from him to W is the entire interest in the
property and, therefore, a deductible interest.
Example (5). H transferred real property to A by gift (reserving the
right to the rentals of the property for a term of 20 years. H died
within the 20-year term, bequeathing the right to the remaining rentals
to a trust for the benefit of W. The terms of the trust satisfy the five
conditions stated in Sec. 20.2056(b)-5, so that the property interest
which passed in trust is considered to have passed from H to W. However,
the interest is a nondeductible interest since it will terminate upon
the expiration of the term and A will thereafter possess or enjoy the
property.
Example (6). H bequeathed a patent to W and A as tenants in common.
In this case, the interest of W will terminate upon the expiration of
the term of the patent, but possession or enjoyment of the property by A
must necessarily cease at the same time. Therefore, since A's possession
or enjoyment cannot outlast the termination of W's interest, the latter
is a deductible interest.
Example (7). A decedent bequeathed $100,000 to his wife, subject to
a direction to his executor to use the bequest for the purchase of an
annuity for the wife. The bequest is a nondeductible interest.
Example (8). Assume that pursuant to local law an allowance for
support is payable to the decedent's surviving spouse during the period
of the administration of the decedent's estate, but that upon her death
or remarriage during such period her right to any further allowance will
terminate. Assume further that the surviving spouse is sole beneficiary
of the decedent's estate. Under such circumstances, the allowance
constitutes a deductible interest since any part of the allowance not
receivable by the surviving spouse during her lifetime will pass to her
estate under the terms of the decedent's will. If, in this example, the
decedent bequeathed only one-third of his residuary estate to his
surviving spouse, then two-thirds of the allowance for support would
constitute a nondeductible terminable interest.
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