What are the Essential Elements of a FLIP-CRUT?

San Francisco, CA – Fairly recently, I was working with a client to develop a Charitable Remainder Trust in to which he would be able to contribute his $3.2 million real property.

In our discussion, my Client communicated his desire to not sell the investment property inside the Charitable Remainder Trust until the second or third year year after donation.

So, I asked him: “Have you ever thought about a FLIP-CRUT?”.

To which he replied: “What is a FLIP-CRUT?”.

To which I said: “It’s an unique variety of Charitable Remainder Trust, which allows you to defer the annual income distribution until after your real estate sells.”.

This is the way it works.

Usually, a Charitable Remainder Trust is required to pay out either a fixed percent (unitrust) or fixed pecuniary amount (annuity) to the Income Recipient, no less frequently than annually.

What happens if the Trust doesn’t have sufficient assets that are capable of generating the required amount each year?

The solution is to start with a Net Income Charitable Remainder Trust, which contains language permitting it to switch over (or FLIP) into a Standard Charitable Remainder Trust on a specified event in the future.

During the initial period, the CRT pays out the lesser of Net Income or the Unitrust amount. If there is no Net Income, then the amount paid out during that period will be zero.

Upon the occurrence of a “Triggering Event”, the Trust then converts to a Standard CRT, and pays out the originally defined percentage.

In this particular client’s example, he contributed a $3.2 million piece of investment property, into an 8 %, 12 year FLIP-CRT.

During the initial period, before the sale of the real property, the net income would be zero.

The CRT begins its annual 8 % unitrust payout to the Client upon the occurrence of the Triggering Event – in this instance the selling of the real property.

There are a couple of critical rules to the use of a FLIP-CRUT:

(1) The “triggering event” may not be something that is “under the control” of the Donor. Oddly enough, , the sale of real property is not deemed being “under the control” of the Donor.

(2) The Grantor may also be the Trustee of the Charitable Remainder Trust (CRT) in some cases. An outside Special Independent Trustee is required to manage the transactions if hard to value assets are donated – such as real property, partnership interests … pretty much anything apart from cash or publicly traded securities .

CONCLUSION: The FLIP-CRUT is a great instrument when you wish to donate
Unmarketable Assets – or those that do not immediately produce income – to a Charitable Remainder Trust. You will still enjoy the substantial tax benefits of a Charitable Remainder Trust, while not being forced to distribute Income until it is available.

Contact a Charitable Giving Lawyer with Ainer and Fraker 800-775-7612 right now to learn how you can profit from the powerful tax benefits of a FLIP-CRUT.