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Legacy Giving

Flip Unitrusts

Goal: Secure payments for life while reducing market risks
Benefit: Potential increased income and tax benefits
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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 1st. 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, suppose a donor owned real estate that she inherited some twenty years ago from her parents. Let's say 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 felt a trust that would pay her 7% 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 might not have been able to do otherwise.

.With real estate in a Flip Unitrust, the documents specify that the trigger event will be the sale of the property. Until the trustsells that property, the unitrust remained a net income trust. Since there is no current income from the property, the trust does not pay any income.

On January 1st after the trigger event (the sale of the property), the trust "Flips" and became a standard unitrust.

The donor will receive a steady income for her lifetime. 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. And, she had the joy of knowing and informing her favorite charity that a significant gift had been made that they 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 may need to make 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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For more information or a confidential discussion of your charitable options, please email or call the Development Officer, Roxanna Tinsley, at (843) 777-2694.

Please note, individual financial circumstances will vary. The information on this site does not constitute legal or tax advice. Donor stories and photographs are for purposes of illustration only. As with all tax and estate planning, please consult your attorney or estate specialist. You may also contact a member of the Professional Advisory Council. All material is copyrighted and is for viewing purposes only. Use of this site signifies your agreement with the terms of use. The content in this Legacy Giving section has been developed for McLeod Health Foundation and is owned by Future Focus. Please report any problems to section webmaster.