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

A "delay clause" is a provision that may be inserted into life insurance contracts providing that a surviving spouse will only be paid if alive at the end of a certain period of time after the death of the first spouse. 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 the insured's spouse if the spouse is living at the end of 60 days after the insured's death, otherwise payment is to contingent beneficiaries.

Under the general rules, a delay clause would create a terminable interest and, accordingly, disqualify the proceeds. The reason is that such a clause creates a possibility that the surviving spouse's interest will end (if the surviving spouse dies within the delay period) and the contingent beneficiaries will receive the proceeds. 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 ordinarily will disqualify the proceeds for the marital deduction – even though the spouse survives the period and actually receives the proceeds.¹

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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 the insured's estate or else a lose-lose situation will be created. If the spouse survives the delay period, the clause will have served no purpose. If the surviving spouse does not live through the full delay period, the clause will result in loss of the marital deduction.

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