Flip Charitable Remainder Unitrust:

Questions Donors Ask

How will my Flip-CRUT payments be taxed

Until the “flip” date, donors will be receiving net income from the trust, which will be taxed to them at ordinary income rates. Once the trust “flips” and becomes a straight unitrust, the donor’s payments will be taxed according to a four-tiered system defined by federal tax law. That system requires that the payments carry out ordinary income first, then capital gains, then tax-free income, and finally return of principal. The amount of the payment in each category will depend on the trust’s overall investment performance, the nature of the assets donors contribute to the trust, and any carryover of income from one year to the next.

Is there a minimum contribution to establish a “Flip” CRUT?

Federal tax law does not set a specific minimum contribution required to establish a Flip-CRUT.

How do I create a Flip-CRUT?

Setting up a Flip-CRUT is not difficult, but donors should be advised by an attorney with expertise in charitable trusts and estate planning. To save donors time and expense, expect to provide an initial draft of the Flip-CRUT agreement for review by donors and their attorney. Once the trust agreement has been signed, you and the donors will simply transfer assets to the trustee to fund the trust.

Can I use real estate or other illiquid assets to fund my trust?

Yes. A Flip-CRUT is specifically designed to accept illiquid assets such as real estate, business interests, and sometimes even tangible personal property. Your organization will need to evaluate illiquid assets to be sure you can accept them and that you can liquidate them within a reasonable period.

Can I delay the start date of my unitrust payments?

Yes. If donors fund their trust with illiquid assets, they will receive only trust net income until the assets are liquidated. Once the assets are liquidated, the trust will begin distributing unitrust payments. If donors fund their trust with cash or appreciated securities, the donor can choose the “flip” date after which the donor wants to receive unitrust payments. Regardless, the donor will be able to claim a tax deduction in the year their trust is created.

How will the Flip-CRUT assets be invested?

Until illiquid assets are liquidated, the trust will hold and maintain those assets. Once all assets in the trust are liquid, the trustee will invest the trust in a portfolio of investments that will not disqualify the trust’s tax-exempt status as well as consider the interests of the income beneficiaries and the charitable remainder beneficiaries.

Can I pay fair market rent to the trust and continue to live in real estate I’ve contributed?

No. Donors may not continue to live in or use real estate contributed to a “Flip” CRUT. Such use risks eliminating the donor’s charitable deduction and causing the value of the real estate to be included in their taxable estate.

Will my charitable deduction be larger than if the donor created an immediate-payment CRUT?

No. The donors’ charitable deduction will be the same as the one they could claim if they created an immediate-payment CRUT. The main advantages of a Flip-CRUT (as compared to a basic CRUT) have to do with 1) the conversion of illiquid assets to an income stream without immediate recognition of capital gain, and 2) the ability to allow the trust assets to grow tax free before the unitrust payments begin.