Unnecessary OP post-mortem:
I think one problem with people leaving this game is that to do anything you need healers and tanks, however their are far more of a need for these then people who enjoy playing them.
With this as the opening line I was a bit surprised to find the idea wouldn't really help this at all. You get to pawn gear off to another character, okay; you get to grind with that character easier, sure; but when raid time comes around and it matters at all, you and/or others will almost certainly put them aside yet again to play the Required Character/Retired Legacy Character/what have you. Maybe some like grinding much more than raiding (I can understand that) but in the game we have grinding can't/doesn't replace raiding as far as progression goes, and if you want to progress this idea won't really help the stated problem at all.
Maybe sometimes a geared alt will be able to fill a non-healer non-tank spot when someone doesn't show up or leaves a guild... but then someone else will have to fill the healer/tank slot opened up unless you're boxing it.
Loot could work in a lot of different ways. In my opinion the totally blind random drop system is fairly dumb for raid loot, serving mainly to let people's time be wasted (good if you're getting subscription fees from them, but not necessary). Even if you were able to paw items off onto alts, it would still be pretty frustrating to go up against a progression target and get 2x an item you no longer need for actual progression of your main raid force. If the annoyingness of rots were taken as the main issue, I think there would be better, more progression-friendly ways to change loot. Checking through the inventories and classes of everyone to see if any potential drops should be excluded would probably be too complicated and error-prone (either people would need to keep the exact loot this particular encounter drops in their inventories even after they are replaced,
or it would need to be able to determine when one item is "better" than another while still allowing niche loot through). Someone simpler like "collect 3 rot drops from this encounter, turn them in for an item of your choice from the same encounter" (maybe with the number needed scaled up for rarer drops) would probably be most palatable/least disruptive to how things work currently while still making rots not a total waste.
Other than that, I think any change to the strict loot eligibility rules (having to be in the killing raid) to make them less strict would kind of defeat that strictness altogether. Restrictions should only really need to discourage loot selling then, in my opinion; having restrictions just to limit the ability to share loot/make the system obtuse to use would be unnecessary. Perhaps we could just define progression as something a guild does rather than just a raid. Something like, "loot can be awarded to anyone in the killing raid, OR any character has been in the killing guild for at least a month and is level 65" (with the "killing guild" being defined by 2/3 majority within the raid or some such). Characters getting loot they haven't "earned," especially from encounters that they might not have been able to beat if that character had been in the raid, is a bit iffy, which is why our system is strict in the first place; on the other hand, giving loot to alts doesn't help progression as such and would make it easier to eventually replace Retired Legacy Characters if nothing else. As long as loot selling was illegal, I think it could potentially work.
Disregard all that though.