Joseph M. Dodge (Florida State), Retained Interest Transfers Under the Estate and Gift Tax, 133 Tax Notes 235 (Oct. 10, 2011):

The proposal aims to simplify the law pertaining to transfers with retained interests and powers under the estate and gift tax that are potentially within §§ 2036-2038. Under the proposal, transfers with retained current-enjoyment interests would be deemed to be incomplete until the earlier to occur of the termination of the interest or the grantor’s death, at which point they would be taxed in full. A transfer in return for a debt obligation contingent on the transferor’s death would be treated as a transfer with a retained current-enjoyment interest. These rules should effectively eliminate the use of GRATs, GRUTs, private annuities, and SCINs in estate planning – transactions that have come into being only because of exploitable estate and gift tax rules. Additionally, the sale of a remainder interest would be ineffective to avoid these rules. The underlying principle is that transfers of this type entail a three-stage series of gratuitous transfers that is appropriately taxed on an ex post (rather than ex ante) basis. Retained-reversion transfers are harmless, and existing section 2037 can be repealed. Retained-power transfers do not result in any delayed wealth transfers, except in the case of a retained power to revoke. The concept of a revocation power would be expanded to include a possibility of receiving corpus distributions. Retained powers to alter, amend, or terminate would cease to be of significance. Section 2702 would be repealed.

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