FLIP Unitrust – The gift to make when timing is everything

Named for the “flip” provision that allows you to defer most of your income payments until a later date, the FLIP Unitrust is an excellent gift plan for cases in which you want to donate illiquid or hard-to-value assets, such as real estate or closely-held stock, and receive income in return. It is also an excellent supplemental retirement plan.

How does it work?

A FLIP Unitrust is a form of Charitable Remainder Unitrust. Unlike a standard unitrust that pays a percentage of the fair market value of the assets to the income beneficiaries, the FLIP Unitrust defers income until a future time when the income switch “flips” on. Until that pre-determined time, the trust pays net income only. If no net income is produced, the trust pays nothing to the income beneficiaries. Once the “flip” event occurs, the trust converts or “flips” to a standard Unitrust that pays a defined percentage of the fair market value of the assets to the beneficiaries beginning at the next valuation date.

This “flip” feature is beneficial for gifts of illiquid or hard-to-value assets. By defining the “flip” event as the sale of the asset, the trust pays little or no income until the asset is sold. This protects the trust from having to pay income when its assets are in illiquid form. Once the asset is sold and the trust becomes liquid, the trust “flips” to a standard Unitrust.

The FLIP Unitrust is also a superb device for building a supplemental, tax-deferred retirement plan. The FLIP feature allows you to donate assets now, but defer or limit income payments until the date of your retirement. In the meantime, you can sit back and watch the principal in the trust grow tax-free until your income payments begin.

What are the Advantages?

  • You can contribute hard-to-value or hard-to-market assets where the timing of the sale and the sale price are uncertain.
  • You can use a FLIP Unitrust as a supplemental retirement plan that grows your assets on a tax-deferred basis until you need them later.
  • You can take an income tax deduction now, but defer income to later.
  • You can fund the trust with highly appreciated assets, allow the trust to diversify the assets tax-free, and avoid all capital gains tax you would have owed if you sold the assets yourself.
  • You can have the satisfaction of making a substantial gift to Oxford University.

Example

A 55-year-old donor contributes $200,000 of appreciated stock with a cost basis of $50,000 to a FLIP Unitrust that pays no income until it "flips" in 10 years at retirement, at which time it begins to pay 5% of the fair market value of the assets. The trust is invested in growth stocks with 8% capital appreciation and no income until the "flip" event, and then is re-invested in a more conservative "balanced" fund that produces 6 capital appreciation and 2% income. Assume IRS Discount Rate of 1.6% for charitable deduction calculation.

Trust principal

$200,000

Income tax deduction

$63,540

Income tax savings (35% bracket)

$22,239

Cap. gains tax savings (15%)

$22,500

Income (year 10)

$7,404

Projected after-tax benefit to income beneficiary

$382,961

Projected benefit to Oxford University

$668,597

PLEASE NOTE: This example is for illustrative purposes only and is not intended as legal or tax advice. Consult your legal and tax advisors prior to making any material decisions based on this data.


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