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FLIP-CRUT Basics – Unmarketable Assets Defined

In a prior post, we discussed the FLIP-CRUT concept in which a Charitable Remainder Trust begins its life as a Net Income Charitable Remainder Trust, and upon a “Triggering Event”, converts to a Standard Charitable Remainder Trust at a fixed percentage distribution.

We also discussed various Treasury Department definitions of Triggering Events, which are deemed not to be under the control of the Trustee or any other person.

One of the most common types of Triggering Events is the sale of Unmarketable Assets, such as the sale of a Personal Residence, other real or commercial property, securities or business holdings that are not publicly traded, and lack any formal marketplace to value and sell.

In Treasury Regulations §1.664-1(a)(7)(ii), the definition of Unmarketable Assets includes:

Assets that are not cash, cash equivalents, or other assets that can be readily sold or exchanged for cash or cash equivalents. For example, unmarketable assets include real property, closely-held stock, and an unregistered security for which there is no available exemption permitting public sale.

Using a FLIP-CRUT to Sell Appreciated Real Estate

Why this definition is important:

If you have a piece of real estate that is highly appreciated in value, and selling it outright would trigger substantial capital gains, a Charitable Remainder Trust is an excellent way to defer the tax on sale.

If you contribute the real property to a Charitable Remainder Trust after a binding commitment to sell exists, then the IRS will disallow the deduction based on the Step Transaction Doctrine.

However, placing real property in a Standard Charitable Remainder Trust – with its fixed annual commitment to pay the income to the Donor – may also not be feasible.

If the real property takes a longer time to sell (certainly more than a year) then a Standard Charitable Remainder Trust will not work.

This is why the Treasury Departments inclusion of Real Property as not readily marketable is critical.  It allows you to contribute the asset immediately, take the appropriate deductions, and then convert to a Standard Charitable Remainder Trust after there is sufficient liquidity (post-sale) to accomplish the annual payout requirements.

Therefore, the FLIP-CRUT is the preferred vehicle when selling appreciated assets that are not readily marketable, such as real estate.

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