Legacy Giving

Goal: Diversify holdings, avoid capital gains, add flexibility for hard-to-sell assets
Benefit: Potential increased income and tax benefits

A Flip Charitable Remainder Unitrust provides the flexibility necessary for some assets by combining aspects of a net income unitrust and a regular unitrust. It is an excellent approach for people with illiquid or unmarketable assets to fund a trust that will make an irrevocable commitment to their favorite charity (or charities).

The IRS created the Flip Unitrust in 1998. The regulations permit the trust to function without paying any income to the trust beneficiary (or beneficiaries). After a predetermined event, such as the sale of the asset funding the trust, the Flip unitrust "flips" (becomes) a regular unitrust on the following January 1st. Since the asset in this case has been sold, the trustee may invest in income-producing assets for the trust and may begin making regular income payments to the beneficiary (ies).

For example, Mary Jones owned real estate that she inherited some twenty years ago from her parents. Her cost basis was only $10,000, but the development land had appreciated dramatically and had a current fair market value of $300,000. She and her advisor discussed options and the idea of a trust that would pay her 7% each year was very attractive to her. It also enabled her to provide a large charitable gift for a charity that was very meaningful to her, something she had hoped she would be able to do.

Her advisor helped Mary transfer the $300,000 in property to a FLIP unitrust. The FLIP unitrust document the advisor drew up specified that the trigger event would be the sale of the property. Until the trust had sold that property, the unitrust remained a net income trust. Since there was no current income from the property, the trust did not pay any income to her.

On January 1st after the trigger event, the trust "flipped" and became a standard unitrust.

Over Mary's lifetime, her advisor estimates the trust will pay out over $440,000. Based on actuarial and income assumptions, when she passes away, the $300,000 trust will have grown to $420,000. Mary will receive a steady income for her lifetime. She also avoided an immediate federal capital gains tax of $43,500 and perhaps saved some potential estate taxes by removing the property from her estate. And, she had the joy of knowing and informing her favorite charity that a significant gift had been made that they could look forward to.

A flip trust provides flexibility for donors with hard to value or illiquid assets. A flip trust can be managed so that illiquid assets may be sold in a tax advantaged manner, the proceeds reinvested in a balanced portfolio and life income payments received by the donor and/or other beneficiaries.

There will probably be expenses associated with a trust, especially a trust involving real estate (taxes, insurance, maintenance for example). The donor should recognize that prior to the trust generating income, the donor may need to make additional gifts to the trust in anticipation of the expenses.

There are many different types of events that can trigger the flip. The event cannot be discretionary and must be specified in the trust documents. Examples of some events that could be used to trigger a flip are:

• A single event
• Birth, death, marriage, or divorce
• The sale of all or a specified part of an illiquid asset
• A person reaching a certain age
• A specific date

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