Flip Unitrust
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, Mary Jones owned real estate that she
inherited some twenty 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 advisor discussed options and the idea of
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
had hoped she would be able to do.
Her advisor helped Mary transfer the $300,000
in property to a FLIP unitrust. The FLIP unitrust
document the advisor drew up specified that
the trigger event would be the sale of 50% 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% income and, since the trust was earning
more than 7% 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
1st after the trigger event, the trust "FLIPed"
and became a standard unitrust.
Over
Mary's lifetime, her advisor 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. 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 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.
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. All material is copyrighted and is for
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Revised:
July 10, 2008 15:50
.