Using a FLIP-CRUT to Sell Real Estate

Oakland, CA – 800-775-7612 – In a prior post, we explained the FLIP-CRUT technique in which a Charitable Remainder Trust starts its life as a Net Income Charitable Remainder Trust, and upon a specific “Triggering Event”, changes to a Standard Charitable Remainder Trust at a defined percentage payout.

Additionally we looked at relevant Treasury Department definitions of Triggering Events, that are judged not to be subject to the control of the Trustee or Grantor or any other person.

Among the most popular examples of Triggering Events is the sale of Unmarketable Assets, for instance, the sale of a Personal Residence, or any other real or commercial property, closely-held securities or various business holdings that are not publicly traded, and therefore are without a formal marketplace to value and sell.

In Treasury Regulations § 1.664-1(a)(7)(ii), the meaning of Unmarketable Assets includes:

Assets that are not cash, cash equivalents, or other assets that can be readily sold or exchanged for cash or cash equivalents. Unmarketable assets include real property, closely-held stock, and an unregistered security for which there is no available exemption permitting public sale.

Why this definition is important when using a FLIP-CRUT to sell appreciated real estate.

If you have a piece of investment that is highly appreciated in value, and selling it outright would result in substantial capital gains tax, a Charitable Remainder Trust is an exceptional way to postpone the tax at the time of sale.

If you donate the real estate to a Charitable Remainder Trust after a binding obligation to sell already exists, then unfortunately the IRS will not allow the deduction based on the Step Transaction Doctrine.

Contributing real property in a Standard Charitable Remainder Trust may also not be feasible due to its fixed yearly commitment to distribute the Unitrust or Annuity amount to the Grantor.

A Standard Charitable Remainder Trust does not get the job done, if the real property takes takes a good amount of time to sell (surely more than a year).

This is why the Treasury Departments inclusion of Real Property as not being readily marketable is critical. It allows you to grant the asset immediately, get back the appropriate deductions, and after that convert to a Standard Charitable Remainder Trust after there is sufficient liquidity (post-sale) to accomplish the annual payout requirements.

Therefore, the FLIP-CRUT is truly the best vehicle when selling appreciated assets that are not readily marketable, like real estate.

Connect with a Planned Giving Attorney at Ainer and Fraker 800-775-7612 today to find out how you can profit from the incredibly powerful tax benefits of a FLIP-CRUT.

Seven FLIP-CRUT Examples that Meet IRS Requirements

Oakland, CA – 408-777-0776 – In a previous post, we discussed the FLIP-CRUT principle in which a Charitable Remainder Trust begins its life as a Net Income Charitable Remainder Trust, and upon a “Triggering Event”, converts to a Conventional Charitable Remainder Trust at a fixed percentage distribution.

Undoubtedly, the entire FLIP-CRUT principle hinges on the Treasury Department’s definition of a Triggering Event – at which time the Net Income CRT transforms to the Requirement CRT, with its yearly payout requirement.

Let’s analyze this Activating Event idea by checking out some basics:

1. The Triggering Event has to be plainly specified in the FLIP-CRUT document. Treas. Reg. §1.664-3(a)(1)(i)(c)
2. The Triggering Event may be a particular DATE that is specified in the FLIP-CRUT document OR it MAY be upon the specific event of an EVENT, however:.
3. If the Triggering Event is specified as an Event, then the event of that Event can not be “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or other individual. Treas. Reg. §1.664-3(a)(1)(i)(c)(1)

Examples of Triggering Events that WOULD NOT Work.

1. Upon the choice of the Donor (or Trustee) to sell the profile of extremely valued openly traded securities;.
2. Whenever the Trustee gets around to it;.
3. Upon the recommendations of the Donor’s financial consultant, CPA or other fiduciary that now is an ideal time to sell.

Each of these are examples of EVENTS that are “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or any other person.

Examples of Triggering Events that WOULD Work:.

1. On the very first day of June in the Third year after the FLIP-CRUT is established;.
2. Upon the marriage, divorce, death, or birth of a child of the Donor;.
3. Upon the sale of unmarketable properties that are not money, cash equivalents, or other assets that can be easily offered or exchanged for money or money equivalents.

Since it is a set date that is defined in the FLIP-CRUT document, # 1 works.

# 2 works because these life occasions are not “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or other individual.

# 3 works since the sale of unmarketable possessions needs 2 parties – a Buyer and a Seller – both of whom need to settle on a substantial number of determining factors. Both sides are not “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or any other person.

Further Treasury Department Guidance about Appropriate Triggering Events.

In Treas. Reg. §1.664-3(a)(1)(i)(e) the Regulations provide seven (7) examples of exactly what an appropriate triggering event might involve. These “safe harbors” should not be thought about exclusive in nature.

They are:.

1. Upon the sale of the Donor’s previous individual home;.
2. The sale of securities for which there is no readily available securities exemption permitting a public sale.
3. When the earnings recipient reaches a particular age;.
4. When the Donor gets wed;.
5. When the Donor divorces;.
6. When the earnings recipient’s very first kid is born; and.
7. When the income recipient’s dad passes away.

While these are not the only situations that will be approved, each of them is a safe harbor, meaning they should be approved if the fact-pattern matches the safe harbor.

When considering establishing a FLIP-CRUT, it is important to have the recommendations of competent legal and tax counsel.

To learn how you can take advantage of the amazing tax benefits of a FLIP-CRUT Consult with a Planned Giving Attorney with Ainer and Fraker 408-777-0776 right away.

FLIP-CRUT Fundamentals

San Jose, CA – 800-775-7612 – Recently, I was talking to a client to create a Charitable Remainder Trust into which he would be able to donate his $3.2 million investment property.

In this meeting, my Client expressed his wish to not sell the commercial property inside the Charitable Remainder Trust until two or more years year after donation.

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

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

I said: “It’s a particular type of Charitable Remainder Trust, allowing you to defer the annual income distribution until after the investment property sells.”.

Here’s the way it operates:

Ordinarily, a Charitable Remainder Trust is required to disburse either a fixed percent (Unitrust) or fixed pecuniary amount (Annuity) to the Grantor, no less frequently than on an annual basis.

What if the Trust doesn’t have assets that are capable of producing that amount each year?

The solution is to begin with a Net Income Charitable Remainder Trust (or NICRUT), which contains provisions which allows it to switch over (or FLIP) into a Standard Charitable Remainder Trust (CRUT) on a specific event in the future.

During the initial term, the CRT will distribute the lesser of Net Income or the Unitrust amount. If there isn’t any Net Income, then the amount distributed that year will be zero.

Upon the occurrence of a “Triggering Event”, the Trust then changes into a Standard CRT, and pays out the initially specified 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, preceding the sale of the real property, the net income would be zero.

The CRT begins its annual 8 % unitrust distribution to the Grantor upon the occurrence of the Triggering Event – here in this situation the sale of the real property.

A few essential rules to using a FLIP-CRUT:

(1) The “triggering event” may not be a factor “under the control” of the Donor. Interestingly enough, , the sale of real property is not treated as being “under the control” of the Donor.

(2) The Client may also be the Trustee of the Charitable Remainder Trust (CRT) in certain cases. However, if difficult to value assets are contributed – for example real property, partnership interests … basically anything other than cash or publicly traded securities – than an outside Special Independent Trustee is going to be required to manage those transactions.

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

To find out more about the amazing tax benefits of a FLIP-CRUT, Contact a Charitable Giving Lawyer at Ainer and Fraker at 408-777-0776 today.