Tax Advantages of Selling Real Estate in a FLIP-CRUT

San Jose, CA – (408) 777-0776 – In a prior post, we explored the FLIP-CRUT concept in which a Charitable Remainder Trust starts its life as a Net Income Charitable Remainder Trust, and at the time of a specific “Triggering Event”, converts to a Standard Charitable Remainder Trust with a defined Unitrust or Annuity distribution.

Additionally we discussed various Treasury Department definitions of Triggering Events, that are deemed not under the control of the Trustee or Grantor or any other person.

Among the most popular instances of Triggering Events is the sale of Unmarketable Assets, for instance, the sale of a Residential or Commercial property, closely-held securities or various business holdings that are not publicly traded, and therefore are without any sort of formal marketplace to value and sell.

Looking at Treasury Regulations § 1.664-1(a)(7)(ii), the definition 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. For example, 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 exceptional way to postpone the tax at the time of sale if you own a piece of investment that has appreciated in value, and selling it outright would cause substantial capital gains.

The IRS will prohibit the deduction due to the Step Transaction Doctrine if you contribute the real property to a Charitable Remainder Trust once an irrevocable commitment to sell exists.

Contributing real property in a Standard Charitable Remainder Trust is also problematic due to its predetermined yearly obligation to pay the income to the Donor.

A Standard Charitable Remainder Trust does not work, if the investment property takes takes a good amount of time to sell (certainly more than a year).

This is why the inclusion by the Treasury Deparment of Real Property as not being readily marketable is essential. It allows you to grant the asset immediately, qualify for the appropriate deductions, and then make the conversion to a Standard Charitable Remainder Trust after there is enough liquidity (post-sale) to accomplish the annual distribution requirements.

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

To learn how you can take advantage of the amazing tax advantages of a FLIP-CRUT Contact a Charitable Giving Attorney at Ainer and Fraker 800-775-7612 right away.

What FLIP-CRUT Triggering Events will the IRS Permit?

Los Gatos, CA – 800-775-7612 – In a prior post, we went over the FLIP-CRUT idea in which a Charitable Remainder Trust starts its life as a Net Income Charitable Remainder Trust, and upon a “Triggering Event”, transforms to a Standard Charitable Remainder Trust at a fixed percentage distribution.

Certainly, the whole FLIP-CRUT idea depends upon the Treasury Department’s definition of a Triggering Event – at which time the Net Income CRT converts to the Standard CRT, with its yearly payment requirement.

So let’s analyze this Triggering Event concept by exploring some fundamentals:

1. The Triggering Event must 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 certain incident of an OCCASION:.
3. If the Triggering Event is specified as an Event, then the event of that Event needs to 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 decision of the Donor (or Trustee) to offer the portfolio of extremely valued openly traded securities;.
2. Whenever the Trustee gets around to it;.
3. Upon the recommendations of the Donor’s financial advisor, CPA or other fiduciary that now is an ideal time to offer.

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 3rd 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 assets that are not cash, money equivalents, or other possessions that can be easily offered or exchanged for money or cash equivalents.

# 1 works because it is a set date that is specified in the FLIP-CRUT document.

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

# 3 works due to the fact that the sale of unmarketable assets requires two parties – a Buyer and a Seller – both of whom should concur on a a great deal of figuring out factors. Both sides are not “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or any other individual.

Additional Treasury Department Guidance about Acceptable Triggering Events.

In Treas. Reg. §1.664-3(a)(1)(i)(e) the Regulations offer seven (7) examples of exactly what an acceptable triggering occasion may look like. These “safe harbors” should not be considered exclusive 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 income recipient reaches a specific age;.
4. When the Donor gets married;.
5. When the Donor divorces;.
6. When the income recipient’s very first child is born; and.
7. When the earnings recipient’s father dies.

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

When considering setting up a FLIP-CRUT, it is critical to have the advice of competent legal and tax counsel.

To learn more about the amazing tax benefits of a FLIP-CRUT Consult with a Planned Giving Attorney at Ainer and Fraker 408-777-0776 right away.

The FLIP-CRUT is One of the Most Flexible Tools in Planned Giving

Oakland, CA – 408-777-0776 – One of the most flexible techniques in Charitable Giving is the FLIP-CRUT.

The FLIP-CRUT helps clients solve the problem where they wish to donate a specific piece of real estate (or other non-liquid property) to a Charitable Remainder Trust, but they aren’t sure exactly when the real property will be sold.

As a General Rule, this is going to be a problem, since a Standard Charitable Remainder Trust is always required to distribute its Unitrust or Annuity amount, whether or not adequate income exists.

The FLIP-CRUT overcomes this problem by enabling you to defer the Unitrust or Annuity payout until after the real estate (or other non-liquid property) is sold.

Here’s how it works:

Normally, a Charitable Remainder Trust is required to pay out either a fixed percentage (unitrust) or fixed dollar amount (annuity) to the Income Recipient, no less than on an annual basis.

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

The solution is to start with a Net Income Charitable Remainder Trust, which contains provisions permitting it to switch over (or FLIP) into a Standard Charitable Remainder Trust on a specified 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 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 donated a $3.2 million piece of investment property, into an 8 %, 12 year FLIP-CRT.

The net income is going to be zero during the initial period, prior to the sale of the real property.

However, upon the occurrence of the Triggering Event – in this instance the sale of the real property – the CRT begins its annual 8 % unitrust distribution to the Client.

Here are a few essential rules to using a FLIP-CRUT:

(1) The “triggering event” may not be something that is “under the control” of the Grantor. Interestingly enough, however, the sale of real estate is not considered being “under the control” of the Grantor.

(2) The Client can also serve as the Trustee of the CRT in certain cases. However, if hard to value assets
are donated – such as real property, partnership interests … essentially anything other than cash or publicly traded securities – than an outside Special Independent Trustee will be required to manage those transactions.

IN CONCLUSION: The FLIP-CRUT is actually a great instrument when you want to transfer Unmarketable Assets – or those that may not immediately produce income – to a CRT. You will still enjoy the substantial tax benefits of a CRT, while not being required to payout Income until it is actually available.

To learn how you can profit from the incredible tax benefits of a FLIP-CRUT Get in touch with a Planned Giving Attorney with Ainer and Fraker 408-777-0776 right away.