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Planned
Giving
Flip
Unitrusts
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).
 To
illustrate a Flip Unitrust, we've created an 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 viewing purposes only. Use of
this site signifies your agreement with the terms
of use. The content in this Planned Giving section has
been developed for Sisters of Notre Dame de Namur, Ohio
Province by Future
Focus. Please report any problems to section
webmaster. Revised: February 6, 2007 21:32.
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Weaver. This page was updated: February 6, 2007 21:32
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