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Section 2702 provides that, for purposes of determining the gift tax consequences of a transfer in trust for the benefit of a member of the transferor's family,1 any interest retained by the transferor that is not a qualified interest is treated as having a value of zero. A qualified interest is a right to receive a specific dollar amount annually, a right to a unitrust payment, or a noncontingent remainder or reversion if all of the other interests in the trust are qualified interests. section 2702 also provides that its special rules do not apply to a transfer that is an "incomplete gift" for gift tax purposes.2 The regulations under §2702 further provide that an interest in trust for purposes of §2702 "includes a power with respect to a trust if the existence of the power would cause any portion of the transfer to be treated as an incomplete gift for purposes of Chapter 12." 3 Thus, to understand the circumstances in which §2702 may be implicated, one must also understand the circumstances in which a retained power over transferred property will render a transfer incomplete for gift tax purposes. This commentary considers the interplay between §2702 and the gift tax completed-transfer doctrine.
Consider the following:
Example 1. Donor (D) transfers property to herself in trust, retaining a right to income for life, remainder at D's death to her descendants, per stirpes. D also retains a power to revoke.
D has made a transfer in trust for the benefit of members of her family, and D's income interest is not a qualified interest. D's power of revocation, however, renders the transfer wholly incomplete for gift tax purposes;4 consequently, §2702 does not apply to the transaction. Compare Example 1 with the following:
Example 2. D transfers property to an irrevocable trust, retaining a right to income for life, remainder to such of D's descendants and in such shares as D may appoint by will and, to the extent D does not so appoint, to D's descendants, per stirpes.
In Example 2, notwithstanding that the trust is irrevocable, D has not made a...