138 / If an insured assigns a life insurance policy in which a spouse is the named beneficiary, will the full amount of the proceeds qualify for the marital deduction?

As a general rule, if a property interest passing to a surviving spouse is subject to an encumbrance, only the value of the property interest in excess of the amount of the encumbrance qualifies for the marital deduction.¹ If the debt that is secured by the policy is actually paid from estate assets, or if the spouse-beneficiary has a right of subrogation against the estate and the estate is solvent, the full amount of the proceeds qualifies for the marital deduction despite the collateral assignment.² (For a policy loan, see Q 187.)