What in the World is a FLIP-CRUT?

Recently, I was working with a client to design a Charitable Remainder Trust to which he could donate his $3.2 million real property.

During the meeting, he expressed his desire not to sell the property inside the Charitable Remainder Trust until the second or third year after contribution.

At which point, I asked him: “Have you ever considered a FLIP-CRUT?”

To which he remarked: “What in the world is a FLIP-CRUT?”

To which I responded:  “It’s a special type of Charitable Remainder Trust, allowing you to defer the annual income payout until after the real property sells.”

Here’s how it works.

Normally, a Charitable Remainder Trust is required to distribute either a fixed percentage (unitrust) or fixed payment amount (annuity) to the Donor, no less than annually.

But what if the Trust doesn’t have assets that are capable of generating that amount each year?

The answer is to begin with a Net Income Charitable Remainder Trust, with provisions allowing it to convert (or FLIP) to a Standard Charitable Remainder Trust on some future event.

During the initial period, the CRT will distribute the lesser of Net Income or the Unitrust amount.  If there is no Net Income, then the amount distributed that year will be zero.

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

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

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

However, upon the occurrence of the Triggering Event – in this case the sale of the real property – the CRT begins it’s annual 8% unitrust distribution to the Donor.

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

(1) The “triggering event” may not be a factor “under the control” of the Donor.  Oddly enough, however, the sale of real property is not deemed to be “under the control” of the Donor.

(2) The Donor may also be the Trustee of the CRT in certain cases.  However, if difficult to value assets are contributed – such as real property, partnership interests…basically anything other than cash or publicly traded securities – than an outside Special Independent Trustee will be required to handle those transactions.

CONCLUSION: The FLIP-CRUT is an ideal vehicle when you wish to transfer Unmarketable Assets – or those that may not immediately produce income – to a Charitable Remainder Trust.  You can still enjoy the substantial tax benefits of a CRT, while not being forced to distribute Income until it is available.