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.