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.