Why the Treasury Department favors the FLIP-CRUT

San Francisco, CA – (800) 775-7612 – In a prior post, we looked at the FLIP-CRUT concept in which a Charitable Remainder Trust begins as as a Net Income Charitable Remainder Trust, and after a “Triggering Event”, changes and becomes a Standard Charitable Remainder Trust with a fixed Unitrust or Annuity distribution.

We also looked at relevant Treasury Department definitions of Triggering Events, which are judged not to be subject to the control of the Trustee or another person.

Among the most common instances of Triggering Events is the sale of Unmarketable Assets, for example, the sale of a Personal Residence, or any other real or commercial property, securities or various business holdings that are not publicly traded, and do not have any sort of public marketplace to value and sell.

In Treasury Regulations § 1.664-1(a)(7)(ii), the interpretation 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 essential when using a FLIP-CRUT to sell appreciated real estate.

A Charitable Remainder Trust is an excellent way to postpone the tax on sale if you possess a piece of real estate that has appreciated in value, so that selling it outright would result in significant capital gains.

The IRS will unfortunately prohibit the deduction based on the Step Transaction Doctrine if you donate the real property to a Charitable Remainder Trust once an irrevocable commitment to sell already exists.

On the other hand, placing real property in a Standard Charitable Remainder Trust – which has a fixed yearly commitment to pay the income to the Grantor – may also not be feasible.

A Standard Charitable Remainder Trust will 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 readily marketable is critical. It allows you to donate the property immediately, take the appropriate deductions, and after that convert to a Standard Charitable Remainder Trust after there is sufficient liquidity (post-sale) to fulfill the yearly distribution requirements.

The FLIP-CRUT is really the best vehicle when offering for sale appreciated assets that are not readily marketable, such as real estate.

Connect with a Family Philanthropy Attorney at Ainer and Fraker 800-775-7612 right now to find out how you can take advantage of the incredible tax benefits of a FLIP-CRUT.

FLIP-CRUT Safe Harbors According to Treasury Regulations

San Francisco, CA – 408-777-0776 – In a prior post, we talked about the FLIP-CRUT idea in which a Charitable Remainder Trust starts its life as an Earnings Charitable Remainder Trust, and upon a “Triggering Event”, transforms to a Standard Charitable Remainder Trust at a set percentage distribution.

Certainly, the whole FLIP-CRUT idea hinges on the Treasury Department’s definition of a Triggering Event – at which time the Net Income CRT transforms to the Standard CRT, with its annual payment requirement.

Let’s examine this Activating Event concept by exploring some fundamentals:

1. The Triggering Event needs to be clearly defined in the FLIP-CRUT document. Treas. Reg. §1.664-3(a)(1)(i)(c)
2. The Triggering Event may be a certain DATE that is specified in the FLIP-CRUT document OR it MAY be upon the specific incident of an EVENT, however:.
If the Triggering Event is defined as an Event, then the occurrence of that Event can not be “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or any 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 feels like it;.
3. Upon the advice of the Donor’s financial consultant, Certified Public Accountant 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 other individual.

Examples of Triggering Events that WOULD Work:.

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

Because it is a fixed date that is specified in the FLIP-CRUT document, # 1 works.

# 2 works due to the fact that these life occasions are not “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or any other individual.

# 3 works since the sale of unmarketable possessions needs two parties – a Purchaser and a Seller – both of whom have to agree on a a great deal of identifying factors. Both sides are not “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or any other person.

Additional Treasury Department Guidance about Acceptable Triggering Events.

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

They are:.

1. Upon the sale of the Donor’s former individual residence;.
2. The sale of securities for which there is no available securities exemption allowing a public sale.
3. When the earnings recipient reaches a particular age;.
4. When the Donor gets married;.
5. When the Donor divorces;.
6. When the earnings recipient’s first kid is born; and.
7. When the income recipient’s dad dies.

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

It is important to have the suggestions of qualified legal and tax counsel when considering establishing a FLIP-CRUT.

Call a Charitable Giving Attorney with Ainer and Fraker 800-775-7612 right away to find out how you can profit from the powerful tax advantages of a FLIP-CRUT.

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.