❗ Key Takeaway: Life comes at you fast, and your financial needs may look very different today than they will a decade from now. We can work with you to ensure that your Charitable Remainder Trust is set up to adapt to those changes. With a Flip Charitable Remainder Trust (Flip CRUT), you can plan in advance to change your trust's format during its term. This strategy can give you the short-term withdrawal flexibility of the NIMCRUT and the long-term payout consistency of the Standard CRUT, and, as a result, it can significantly enhance the planning opportunities available to you.
Let's recap: What is a Charitable Remainder Trust?As you likely know by now, charitable remainder trusts (CRUTs) are a form of tax-deferred account, much like an IRA, that are designed to incentivize charitable giving in exchange for significant tax benefits: tax deferral and the ability to lower your tax rate via income smoothing.
We offer three basic forms of Charitable Remainder Unitrust: the standard CRUT, the NIMCRUT, and the Flip CRUT. These formats carry similar benefits — they are all tax exempt, you get a charitable deduction when you put assets into each, and you'll leave the remainder for a charity at the end. The primary difference — and the focus of the prior posts — is in how and when you receive distributions from the trust.
What is a Flip Charitable Remainder Unitrust (Flip CRUT)?A Flip CRUT shares many of the features of a NIMCRUT and a Standard CRUT. In fact, a Flip CRUT actually is a NIMCRUT for the first few years, and then it "flips" to a Standard CRUT. Kind of weird, right? Why would one want to hedge like this, and what does it look like in practice?
Flip CRUTs are designed to account for the ever changing needs of the person setting up the trust. Say that today, you're still working, or you don't have a family yet, and your cash needs are low. Or maybe you have illiquid assets that aren't going to be producing real capital gains for a while. In these circumstances, a NIMCRUT might make sense; after all, NIMCRUTs are designed to generate better returns on investment by allowing you to defer your withdrawals. But there's a good chance your needs will change — maybe you plan to retire and want consistent payouts in the future, and your illiquid asset is heading for liquidity (like an IPO). In that case, you may appreciate the opportunity to switch to a Standard CRUT later.
Tl;dr: A Flip CRUT is an interesting alternative to the other two charitable remainder trusts because you can take advantage of the potentially higher ROI of the NIMCRUT while also accounting for your changing financial needs.
When should I consider a Flip CRUT and what is the value?Everything we do is designed to help you optimize for whatever is most important to you. For some people, it's all about returns. For others predictability and minimizing risk win out. Still others think their needs might change over time. The main benefit of the Flip CRUT is that it allows you to maximize your returns for now with the NIMCRUT's flexible distribution methodology and make-up provision, and then you can switch to the consistent payouts of the Standard CRUT down the line.
People often consider a Flip CRUT in the following situations:
- You have an unmarketable asset — like startup equity or real estate — and you don't know when it's going to pay out; in these circumstances, a Flip CRUT becomes a near necessity, because a pure Standard CRUT would require your trust to pay you money every year, and that might not even be possible.
- You have concerns about the long-term performance of an asset or portfolio; in this case, a pure NIMCRUT might not be a great fit because if an asset doesn't grow over time, the rules of the NIMCRUT limits your ability to withdraw much money.
- You expect that your income goals will change once you reach a specific age or life milestone, like retirement, marriage, or the birth of a child; here, a NIMCRUT might make sense in the beginning so you can further defer your payouts and your taxes, but a Standard CRUT could be a better fit later, when you'd prefer a steadier income.
Choose an asset. You, the individual setting up the trust, choose an appreciated asset that you'd like to contribute to a trust. This could be any asset that has appreciated or is likely to appreciate significantly; the most common assets we see from our users are start-up equity, crypto, public equities, and certain alternative private assets.
Designate a beneficiary. You designate an income beneficiary — the person who will receive payments from the trust. Most of our users choose to be the income beneficiary themselves and/or name a partner or child.
Choose a trust type. If you select a Flip CRUT, your trust begins as a NIMCRUT. In the beginning stages, there will effectively be no difference between a Flip CRUT and a NIMCRUT.
Set your flip trigger. This is the only step unique to a Flip CRUT. The "flip trigger" is a fancy way of describing the factor that dictates when the trust flips to a standard CRUT. (We'll cover examples and reasons to choose specific flip triggers below.)
Transfer assets & get a deduction. You transfer your chosen assets to the trust, and you get an immediate charitable deduction, usually equal to about 10% of the value of the asset you put in.
Sell assets tax free. This is the key, and it's the same no matter the type of Charitable Remainder Trust you choose: You sell your asset and, in most cases, the trust pays no taxes on that sale, allowing you to grow more money for longer.
Take your annual withdrawal, or don't (pre-flip). So you've decided you'd like a distribution. What now? The trust has to realize income by selling an asset; otherwise it won't have the income to meet your withdrawal needs.
The trust flips. The time has come: The flip trigger you set when you formed the trust has finally occurred. The trust is now effectively a Standard CRUT.
Take your annual withdrawal (post-flip). With a standard CRUT, this is a fixed percentage of your trust's assets every year no matter what. (See below for more details.)
Leave the remainder to charity. The remainder —whatever is left in the trust at the end of the trust's term — is donated to a charitable organization. Recall that this is the reason your money gets to grow tax free in the first place: You get the tax exemption, and in exchange you promise to leave the remainder to another tax-exempt entity — a charity.
What exactly is a flip trigger?A flip trigger (or triggering event) is a specific event or time that determines when the trust flips from a NIMCRUT to a standard CRUT. The IRS has identified and pre-approved a few common triggering events, including flipping the trust:
- On a specific date;
- When you sell a previously unmarketable asset or security (like startup equity);
- When you sell your residence;
- When you reach a specific age;
- When you get married or divorced;
- Upon the birth of a child; and
- Upon the passing of a partner or parent.
Why might you choose a Flip CRUT?There are a variety of reasons you might choose a Flip CRUT. Maybe you have illiquid assets, maybe you’re interested in planning for future uncertainty, or maybe you just aren’t comfortable with locking into a single charitable trust format for the entire length of the trust.
We're going to cover the most common scenarios why you might choose a Flip CRUT: initially funding the trust with an illiquid asset and/or a preference for steady payouts in the future.
Many startup and pre-launch crypto employees have experienced this reality: their equity or tokens are growing rapidly in value, but they're not going to be liquid — and the employee isn't going to have an opportunity to take gains off the table — until a secondary opportunity or a major liquidity event like an IPO. And even then, those events (of course) aren't guaranteed. (This is also true for a variety of illiquid asset classes, including real estate, art, private equity, and others.)
- Standard CRUT: First, in most cases like this, you can rule out a Standard CRUT. Standard CRUTs require a payout each year no matter what. But if you have only illiquid assets in your trust, this can be a problem: To meet the trust's payout obligations, you'd have to distribute shares to yourself, which would negate the main benefit of CRUTs: tax-exempt treatment.
- NIMCRUT: A NIMCRUT might be a better fit at the beginning: It would give you the opportunity to defer your withdrawals while building up your "make-up account" in the years before your liquidity event, and then you can withdraw some or all of the accumulated gains when you do sell. (Assuming it doesn't exceed the cumulative make-up account to date.)
- Flip CRUT. But a NIMCRUT might not be a perfect fit forever either. Maybe you like the idea of building your make-up amount for a few years so you can further defer your taxes and take a large payout after you exit. But you're actually most interested in consistent annual payouts, regardless of how the asset performs once you sell it. By choosing the Flip CRUT, you get to build up your make-up provision (NIMCRUT) and then when the asset finally sells you take a larger distribution and then "flip" to a standard CRUT.
Account for exogenous events or life goals. The main practical insight is that with a Flip CRUT, you can enjoy the benefits of a NIMCRUT in the early years of a trust and potentially de-risk situations in your life by designating the trust flip to a Standard CRUT at a later date or event.
Returns. That flexibility allows a NIMCRUT's assets to compound longer in a tax free environment, while offering you an opportunity to plan for potential future changes and needs.
In short, although everyone's preferences and circumstances are different, this structure can be a good fit for customers who like the NIMCRUTs distribution control but either own illiquid assets or want to lock in steady payouts in the future.