Saratoga, CA – 408-777-0776 – One of the most flexible techniques in the Planned Giving Attorney’s toolbox is the FLIP-CRUT.
It helps clients who wish to contribute a specific piece of real estate (or other unmarketable assets) to a Charitable Remainder Trust, but they aren’t certain exactly when the real property is going to be sold.
As a General Rule, this is going to be a big problem, since a Standard Charitable Remainder Trust is obligated to distribute its Unitrust or Annuity amount regardless of whether sufficient income exists.
The FLIP-CRUT solves this problem by permitting you to defer the Unitrust or Annuity distribution until after the investment property (or other unmarketable asset) is sold.
This is the way it works.
Usually, a Charitable Remainder Trust is required to disburse either a fixed percentage (unitrust) or fixed payment amount (annuity) to the Donor, no less frequently than on an annual basis.
But what happens the Trust doesn’t have assets that are capable of paying out the required amount yearly?
The answer is to start with a Net Income Charitable Remainder Trust, which has provisions allowing it to switch over (or FLIP) into a Standard Charitable Remainder Trust on a specified event in the future.
During the initial term, the CRT distributes the lesser of Net Income or the Unitrust amount. The amount paid out that year will be zero if there is no Net Income.
Upon the occurrence of a “Triggering Event”, the Trust then converts to a Standard Charitable Remainder Trust, and pays out the originally specified percentage.
For this client’s scenario, he contributed a $3.2 million piece of investment property, into an 8 %, 12 year FLIP-CRT.
During the initial period, prior to the sale of the real estate, the net income will 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 estate.
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. Interestingly enough, , the sale of real estate is not treated as to be “under the control” of the Grantor.
(2) The Donor may also be the Trustee of the CRT in some cases. An outside Special Independent Trustee is going to be required to manage the transactions if hard to value assets are donated – such as real estate, partnership interests … pretty much anything other than cash or publicly traded securities .
IN CONCLUSION: The FLIP-CRUT is an excellent instrument when you wish to donate Unmarketable Assets – or those that do not immediately produce income – to a Charitable Remainder Trust. You may still enjoy the substantial tax benefits of a Charitable Remainder Trust, while not being required to disperse Income until it is actually available.
Get in touch with a Family Philanthropy Attorney at Ainer and Fraker 408-777-0776 right now to find out how you can profit from the amazing tax benefits of a FLIP-CRUT.