Cannot create a 365 account because the email is specified as a recovery email for an old account

Hello Jason Hobbs

From what you described, your wife’s email address appears to be listed as security/recovery information on an older Microsoft account.

Unfortunately, that email address cannot usually be released from the old account unless the owner can first recover and access that account. For privacy and security reasons, we cannot access the account or change its recovery details on someone’s behalf.

The next possible step is for your wife to use the Microsoft account recovery form here: Microsoft account recovery form. She’ll need to provide a different working email address where Microsoft can contact her about the recovery request. She should also fill in as much information as possible about the old account, such as previous passwords, services used, contacts, or any account details she remembers.

If the old account can be recovered, she can sign in and remove or update the recovery email from the account’s security information.

If the account cannot be recovered, the fastest workaround is to create the new Microsoft account using a different email address, then use that account to accept the Microsoft 365 Family invitation. Microsoft 365 Family can be shared by email invitation or sharing link, and the invited person will be prompted to sign in or create a Microsoft account to join.

I hope this helps clarify the situation. Have a nice day.