Goal: Diversify holdings, avoid capital gains, add flexibility for hard-to-sell assets
Benefit: Potential increased income and tax benefits
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).
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 the property. Until the trust had sold that
property, the unitrust remained a net income trust. Since there was no
current income from the property, the trust did not pay any income to
On January 1st after the trigger event, the trust "flipped" 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. She also avoided an immediate federal capital gains
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.
For more information or a confidential discussion of your charitable options, please email or call the Senior Director of Development, Jean Maginnis, at 207-893-7899.
Please note, individual financial circumstances
will vary. The information on this site does not constitute legal or tax advice, either in whole or in part. 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 viewing purposes
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