IRC Section 2702 is a special valuation rule that applies to certain intra family transfers of interests in trusts where the transferor retains a term interest, such as a right to annuity payments or unitrust amounts. When the retained interest does not meet specific requirements, its value is treated as zero for gift tax purposes, causing the full value of the transferred remainder to be treated as a taxable gift. The classic compliant design under Section 2702 is the grantor retained annuity trust, or GRAT, which uses a qualifying annuity interest so that the retained value can be recognized and the taxable gift can be minimized. For life insurance and estate planning, Section 2702 helps govern how parents structure transfers of appreciating assets and align them with insurance used to provide liquidity or equalize inheritances.

In practice, advisors encounter IRC Section 2702 when clients are exploring GRATs or similar techniques to shift future appreciation to children at a modest gift tax cost. A client might transfer interests in a closely held business or investment portfolio into a GRAT, retain a high annuity stream for a fixed term, and allow any remaining value at the end of the term to pass to heirs. Life insurance can complement these arrangements by providing liquidity if the grantor dies during the GRAT term or by protecting heirs in case returns do not meet expectations. Section 2702 ensures that only properly structured retained interests receive favorable valuation treatment, so advisors work closely with attorneys to confirm that trust terms conform to the regulations. Understanding 2702 allows producers to place life insurance within a broader estate freeze strategy, recognizing how GRATs and related vehicles interact with transfer tax rules and intergenerational planning.