Planned Giving
Flip Charitable Remainder
A Flip Charitable Remainder Unitrust provides the flexibility necessary for some assets by combining aspects of a net income unitrust, which pays income only if it earns income to pay out, and a regular unitrust. It is an excellent approach for people with illiquid or unmarketable assets to fund a trust that will make an irrevocable commitment to their favorite charity (or charities).
The IRS created the Flip Unitrust in 1998. The regulations permit the trust to function without paying any income to the trust beneficiary (or beneficiaries). After a predetermined event, such as the sale of the asset funding the trust, the Flip unitrust "flips" (becomes) a regular unitrust on the following January 1st. Since the asset in this case has been sold, the trustee has funds to invest in income-producing assets for the trust and may begin making regular income payments to the beneficiary (ies).
For example, let's say a donor owned real estate with a cost basis of only $10,000, but the land had appreciated dramatically and had a current fair market value of $300,000. If the land was sold and the capital gains tax paid, the donor would have significant less net proceeds to invest to produce income. However, a charitable trust could be established, the property donated to the trust and when the property was sold, the proceeds invested so that a 7% return was generated each year. As a charitable trust, it would provide a charitable deduction for the donor and a large charitable gift for a charity. It would also mean the full proceeds of the sale of the property would be invested to produce income as capital gains tax would not be paid by the charitable trust.
But property doesn't always sell immediately and there might not be cash in the trust at the beginning to pay the 7%. So, a FLIP unitrust document is created that would specify that the trigger event would be the sale of the property. Until the trust had sold that property, the unitrust would remain a net income trust. Since there was no current income from the property, the trust would not have to pay out any income. Once the trigger event occurs, the trust would then flip to a regular trust and would begin earning and paying out income.
A flip trust provides flexibility for donors with hard to value or illiquid assets. A flip trust can be managed so that illiquid assets may be sold in a tax advantaged manner, the proceeds reinvested in a balanced portfolio and life income payments received by the donor and/or other beneficiaries.
There will probably be expenses associated with a trust, especially a trust involving real estate (taxes, insurance, maintenance for example). The donor should recognize that prior to the trust generating income, the donor may need to make additional gifts to the trust in anticipation of the trust expenses.
There are many different types of events that can trigger the flip. The event cannot be discretionary and must be specified in the trust documents. Examples of some events that could be used to trigger a flip are:
A single event
Birth, death, marriage, or divorce
The sale of all or a specified part of an illiquid asset
A person reaching a certain age
A specific date
