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A Flip Charitable Remainder Unitrust
provides the flexibility necessary
for some assets by combining aspects
of a net income unitrust 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 1. Since
the asset in this case has been sold,
the trustee may invest in income-producing
assets for the trust and may begin
making regular income payments to
the beneficiary (ies).
 For
example, Mary Jones owned real estate
that she inherited some 20 years ago
from her parents. Her cost basis was
only $10,000, but the development
land had appreciated dramatically
and had a current fair market value
of $300,000. She and her adviser discussed
options, and the idea of a trust that
would pay her 7 percent each year
was very attractive to her. It also
enabled her to provide a large charitable
gift for a charity that was very meaningful
to her, something she had hoped she
would be able to do.
Her adviser helped Mary transfer
the $300,000 in property to a FLIP
unitrust. The FLIP unitrust document
the adviser drew up specified that
the trigger event would be the sale
of 50 percent or more of the property.
Until the trust had sold that property,
the unitrust remained a net income
with makeup trust. Since there was
no current income from the property,
the trust did not pay any income to
her.
The property did not sell for about
two years. Under the net income rules,
the proceeds of the sale were invested
and Mary began to receive the 7 percent
income and, since the trust was earning
more than 7 percent on its investments,
it also made up part of the income
that had not been paid prior to the
sale of the real estate. On January
1 after the trigger event, the trust
"FLIPed" and became a standard unitrust.
Over Mary's lifetime, her adviser
estimates the trust will pay out over
$440,000. Based on actuarial and income
assumptions, when she passes away,
the $300,000 trust will have grown
to $420,000.  Mary
will receive a steady income for her
lifetime, with about two-thirds of
the payouts taxed at favorable capital
gain rates. She also avoided an immediate
capital gain tax of $43,500 and perhaps
saved some potential estate taxes
by removing the property from her
estate. She also had the joy of knowing
and informing her favorite charity
that a significant gift had been made
that it could look forward to.
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 will need to fund
the expenses by making additional
gifts to the trust in anticipation
of the 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
Return to Charitable
Remainder Trust story or the Real
Estate story.
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