Friday April 26, 2024
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3.11.2 Retirement/FLIP Unitrust
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The retirement/FLIP charitable remainder unitrust (CRUT) includes several options. A person may wish to contribute equal amounts until retirement. Alternatively, an individual may have appreciated stock or land and desire to make contributions over two, three, four, five years or more. Finally, if an individual desires to select a future retirement date, he or she may select a FLIP CRUT with a fixed date for the FLIP or retirement time. The retirement CRUT plan may include either a net income plus makeup CRUT or a FLIP CRUT.
The document in Program 40, the One to Eight Lives Unitrust program, includes the net income plus makeup and the FLIP options. The FLIP options may use a liquidity standard or a retirement date for the FLIP "trigger" event. The unitrust will "FLIP" on January 1 following the selected FLIP trigger event.
Example 3.11.2A Equal Contributions
Mary and John Jones are both age 55. They plan to retire in ten years and would like to contribute $50,000 each year until retirement.
Since a unitrust is valued each year, it is permissible to make additions to the trust. John and Mary initially fund the trust with $50,000 and then make annual $50,000 additions, for a total funding of $500,000 over ten years. Since their desire is to retire after ten years and to maximize income during retirement, the trustee of the net income unitrust invests for growth for the period of ten years. At the end of ten years, the trust has grown to $782,274.
The trustee then changes from a growth mode, with approximately 1% earned and paid out and the balance in growth stock, to an income mode. After retirement, the 6% plus the make-up amounts are distributed. During the majority of their retired lives, they will be receiving approximately 8% income. However, there is still some growth of the principal. This growth to over $1 million during the balance of their life also enhances their income and provides inflation protection.
This plan is an excellent means for building tax-free growth for their retirement years. John and Mary receive approximately $50,000 to $60,000 each year for a total retirement income of nearly $1.5 million.
Real Estate Retirement Unitrust
Another option exists if the donors hold real estate. There are many circumstances in which real estate might be contributed and sold over a period of two to six years.
Example 3.11.2B Two Real Estate Contributions
Bill and Kathryn Hansen bought development real estate on the outskirts of town ten years ago. Property development has slowly but steadily moved their direction and there now is a commercial center adjacent to their property. Local area developers are knocking on their door, desiring to purchase their property and to build new commercial facilities.
Bill is 52 and Kathryn is 50. They plan to retire in about ten years. Since it is now the best time to sell, they believe that they should sell the property but would like to "rollover" the property without payment of tax. By creating a net income plus makeup unitrust and transferring half of the property this year and half of the property next year, they benefit in several ways.
First, the appreciated-property charitable deduction of approximately $60,000 each year may be fully utilized, since their income is $200,000 and 30% of that limit would be $60,000. Second, the property logically would be developed in two phases. By selling half this year and half next year, they maximize their total return. Third, their trustee may then transfer the proceeds into growth stocks for the ten years. At that time, they will have over $1.7 million in the trust and the trustee may then begin making retirement income payments of over $86,000 annually to Bill and Kathryn.
During their two lives, the total income paid out will be over $4.4 million. With their income tax savings and the bypass of capital gain, they are very pleased with the retirement unitrust plan. Finally, after their two lives, a gift of almost $3 million will be made to their favorite charities.
FLIP Unitrust Options
A FLIP unitrust is a NICRUT or NIMCRUT that may be converted to a standard unitrust. The FLIP trust operates with a "trigger" event. This may be the sale of a nonmarketable asset such as land, a future date or an event such as marriage, divorce or other occurrence not within control of the trustee. The FLIP may be used for retirement purposes, but also is quite convenient for handling the contribution and sale of real estate. Many donors would eventually like to receive the steady payout of a Type I or standard unitrust. The FLIP is an excellent means for achieving the conversion of real estate into a Type I trust.
If the individual desires to select the time of the FLIP date, then it may be appropriate to hold a moderate cost city lot in the trust. This version of the unitrust is described as the "Flex-FLIP" method. The trigger in this trust for the FLIP is the sale of the lot. When the donor desires to change from a net plus makeup to a standard unitrust, the trustee sells the lot. This method is acceptable, since the sale of a nonmarketable asset is a permissible FLIP trigger event. The Flex-FLIP is qualified even if the lot is a very small fraction of the value of the trust.
Example 3.11.2C Real Estate FLIP Unitrust
Mary Jones owns real estate that she inherited twenty years ago from her parents. Her cost basis is only $10,000, but the development land has now appreciated dramatically and has a current fair market value of $500,000. She would like to create a trust and desires to know that the trust will pay her 6% each year.
Mary transfers the $500,000 in property to a FLIP unitrust. The FLIP unitrust document specifies that the trigger event will be the sale of 50% or more of the property. Until the trust has sold that property, the unitrust remains a net income with makeup trust. Since there is no current income from the property, the trust does not pay income to her.
The property does not sell until the middle of 2024. Under the net income rules, the proceeds are then invested and Mary will receive the 6%, plus makeup if they earn more than 6%, until the end of 2024. On January 1, 2025 the trust "FLIPs" and becomes a standard unitrust. Any deficit from the first years is forfeited, but Mary believes that it is more important for her to have the assurance that the trust will now pay 6%, regardless of fluctuations in the stock market.
Over Mary's lifetime, the trust pays out over $740,000. When she passes away, the $500,000 trust will have grown to $700,000. Mary receives steady income, with about one-half of the payouts taxed at favorable capital gain rates. Finally, she will make a generous gift to her favorite charities.
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Case Studies on Retirement/FLIP Unitrust
A Unitrust with a DAF for Education:
Elizabeth Johnson, age 70, was a distinguished professor of biochemistry who devoted countless hours to research, writing and lecturing. During her years of study, she had attended many universities.
The Trash Talking CRT:
Hank Scott, 65, and Bill Robb, 55, own a successful partnership that hauls garbage and teaches courses on public speaking appropriately called - Trash Talking. Hank and Bill each have a 50% interest in Trash Talking. They have run the partnership together for many enjoyable years. However Hank, in recent years, has grown weary of Trash Talking. Hank is considering selling his interest to Bill's son, Jason. The partnership is worth approximately $1 million, and its assets consist mainly of trucking equipment, an office building, and land. Trash Talking has debt of approximately $200,000. Hank's basis in the partnership is very low, thus he realizes that a sale of his 50% interest in the partnership would produce a very large capital gains tax.
Sinking Stock Market Signals Early End to Donor's CRT, Part 2 of 2:
Margaret Young, 85, created a one-life 7% net income with makeup charitable remainder unitrust for her only nephew, Randy. Margaret funded the NIMCRUT with $1 million of appreciated property. She wanted the trust to be invested for growth for a period of five years and then begin distributing income to Randy when he turned 65. Margaret wanted to help Randy financially during his latter years, since he had very modest retirement savings.
The Super Retirement Unitrust:
Dale and Darlene Sullivan, both age 55, are executives who have been employed over the years by a number of high tech and internet based companies. They are known throughout the industry as marketing gurus who have been involved in taking a number of companies public. Instead of taking a salary at these various companies, they have opted to take their compensation in the form of nonqualified or nonstatutory options. These are the kinds of options that when exercised create reportable ordinary income for the difference between the exercise price and the fair market value of the stock at the time of exercise. For example, if Dale and Darlene are holders of a nonqualified option in which they can purchase a share of stock currently valued at $50 for an exercise price of $10, then they are required to report ordinary income of $40 on their tax return.
Exit Strategies for Real Estate Investors, Part 14:
Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl's passion was real estate, and he was very successful in his investments.
Exit Strategies for Real Estate Investors, Part 15:
Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl's passion was real estate, and he was very successful in his investments.
Exit Strategies for Real Estate Investors, Part 16:
Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl's passion was real estate, and he was very successful in his investments.
Swenson "Early" Retirement, Part 1:
Bill and Clara Swenson consider themselves very fortunate. Bill was born in Norway. When he was seven years old, his parents immigrated to America. He attended high school and State College in Northern Minnesota. After he received a business degree, Bill moved back home and started a snowmobile and boating dealership. He and Clara worked very hard and now own two other dealerships. All are proprietorships. They also bought a small hotel and four commercial properties in town.
Building a Bridge Supported by a Trust:
Raymond and Patti Steele, both age 60, are successful real estate investors. In 1985, they purchased a 20-acre parcel of land on the outskirts of town for $200,000. They have recently been approached by a local home builder who develops upscale retirement communities and desires to purchase this property as part of a master development plan. In previous conversations with the builder, the purchase price would probably be in the range of $40,000-$50,000 per acre.
A Primary Characteristic of a NIMCRUT... Defer, Defer, Defer:
Jonathan Goldman, age 72, and his wife, Joanna, age 62, are both retired from successful careers in public relations and advertising. When Jonathan retired five years ago, his company provided him with a nonqualified deferred compensation plan which would pay him income until he was 80 years of age. Therefore, eight years remain on the deferred compensation agreement. After the compensation agreement terminates, Jonathan would like to provide income to his wife for a period of seven years. However, if she passes away before the seven years, the income would be paid to their two children, ages 35 and 40.
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Private Letter Rulings
PLR
199907013 Discretion to Allocate Capital Gain:
In states that have passed the Uniform Principal and Income Act, a trustee of many trusts may be given the power to allocate capital gains to distributable income or to principal. However, effective Jan. 2, 2004, a charitable remainder unitrust under Reg. 1.664-3(a)(1)(i)(b)(3) is precluded from permitting the trustee to have a purely discretionary power to allocate capital gain.
PLR
9442017 Capital Gain Discretion:
In PLR 9442017, several powers were approved for inclusion in the trust. First, so long as the trustee has no discretion to allocate income among recipients, under Reg. 1.664-3(a)3(ii) there is no problem with the retention of a right to appoint a successor trustee, including one of the trust grantors.
PLR
9825001 Unitrust Invested in Variable Annuity Contracts:
The trustee of a unitrust used trust assets to purchase two commercial deferred annuity agreements. The Service held that the purchase by a charitable remainder unitrust of variable annuity contracts 1) would not adversely affect the unitrust's status under Sec. 664 and the current regulations thereunder, and 2) is not an act of self-dealing.
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