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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.