Retained Interest Transfers Under the Estate and Gift Tax

Joseph M. Dodge

Florida State University - College of Law

October 14, 2011

Tax Notes, Vol. 133, p. 235, 2011
FSU College of Law, Public Law Research Paper No. 559
The Shelf Project

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 current IRC sections 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 Retained-reversion transfers are harmless, and existing section 2037 can be repealed.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 Section 2702 would be repealed.

The proposal is offered as a part of the Shelf Project. The Shelf Project is a collaboration of tax professionals to develop proposals to raise revenue without a VAT or a rate increase. Shelf Project proposals have a bounce because they reduce inefficiency and deadweight loss, while raising revenue. Shelf Project proposals would improve the fairness, efficiency, and rationality of the tax system.

Shelf Project proposals follow the format of a congressional tax writing committee report in explaining current law, what is wrong with it, and how to fix it.

Number of Pages in PDF File: 11

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Date posted: October 15, 2011  

Suggested Citation

Dodge, Joseph M., Retained Interest Transfers Under the Estate and Gift Tax (October 14, 2011). Tax Notes, Vol. 133, p. 235, 2011; FSU College of Law, Public Law Research Paper No. 559; The Shelf Project. Available at SSRN: https://ssrn.com/abstract=1944327

Contact Information

Joseph M. Dodge (Contact Author)
Florida State University - College of Law ( email )
425 W. Jefferson Street
Tallahassee, FL 32306
United States
850-644-4590 (Phone)

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