Frequently Asked Questions

1. What is a Charitable Remainder Unitrust?
2. What Formats are available for Charitable Remainder Unitrusts?
3. What are some possible, personal financial benefits for creating a Charitable Remainder Trust?
4. Who are the Candidates for a Charitable Remainder Trust?
5. How is the income tax charitable deduction calculated for a gift to a Charitable Remainder Trust?
6. What are the gift and estate tax consequences of retaining an income interest in a Charitable Remainder Trust?
7. What tax and information returns are required after a Charitable Remainder Trust is created?
8. What are the Annual Valuation Rules for Charitable Remainder Unitrusts? and Why are the Annual Valuation Rules Important?
9. What is a Charitable Remainder Annuity Trust?
10. What Factors Should I Consider When Choosing a Payout Format for my Charitable Remainder Trust?
11. How do I select a measuring term for my Charitable Remainder Trust?
12. What are some methods of income deferral within a Flip Charitable Remainder Unitrust (Flip-CRUT) or a Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT)?

13. What is a Flip Charitable Remainder Unitrust (Flip-CRUT)?

    Some donors may fund a Charitable Remainder Unitrust (CRUT) with unmarketable assets that produce little or no income. Oftentimes, the donor may want the income beneficiary to receive an income based upon the total value of trust assets. The charitable planner will recognize a Standard Charitable Remainder Unitrust (SCRUT) cannot make payments to the income beneficiary until the unmarketable assets, such as real estate, can be sold and converted to a more liquid investment.

    Prior to 1997, one of the solutions to this problem was the utilization of the net income features of a Net Income with Make-up Charitable Remainder Unitrust (NIMCRUT). However, this arrangement was not always satisfactory for the donor who wanted to provide cash flow distributions based upon the features of a SCRUT. The IRS issued Temporary Regulations in April 1997 and Final Regulations in December 1998 to solve this dilemma with guidelines for the creation of a "flip unitrust". Although the concept was not new, the IRS regulations made this type of CRT cash flow planning technique a more mainstream alternative.

    The basic concept of the flip trust is to establish a NIMCRUT that receives unmarketable assets, which produce little or no income. Following the sale of the unmarketable asset, the trust would include provisions that require the trust to "flip" to a standard unitrust (SCRUT) and pay cash flow to the income beneficiary based upon the stated payout rate.

    The life cycle of a Flip-CRUT is generally characterized by two phases. In the initial phase, a FLIP Unitrust only distributes the trust’s net income. In the second phase, following the occurrence of a predetermined triggering event, the trust “flips” to pay out a fixed percentage of the trust’s annual fair market value. The flip occurs on January 1^st of the year following the triggering event. The triggering event must be defined in the trust document and may be based on:

    • a marriage,
    • a divorce,
    • a death,
    • the birth of a child,
    • a date specified in the trust,
    • the sale of an unmarketable asset, or
    • an event not in the control of any person.

    Unmarketable assets are assets that are not cash, cash equivalents, or marketable securities.

    Since the SCRUT does not provide for a make-up amount, any deficiency amount will be forfeited started with the tax year after the triggering event occurs.

14. What are the Typical Responsibilities of a Trustee of a Charitable Remainder Trust?
15. What is an “Independent” Special Trustee (IST)? When is an IST used in Charitable Remainder Trust Planning?