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.
Obviously, the entire FLIP-CRUT concept hinges on the Treasury Department’s definition of a Triggering Event – at which time the Net Income CRT converts to the Standard CRT, with its annual payout requirement.
So let’s examine this Triggering Event concept by exploring some basics:
- The Triggering Event must be clearly defined in the FLIP-CRUT document Treas. Reg. §1.664-3(a)(1)(i)(c)
- The Triggering Event may be a specific DATE that is defined in the FLIP-CRUT document OR it MAY be upon the specific occurrence of an EVENT, however:
- If the Triggering Event is defined as an Event, then the occurrence of that Event must not be “Discretionary With”, or “Under the Control of” the Donor, the Trustee, or any other person Treas. Reg. §1.664-3(a)(1)(i)(c)(1)
Examples of Triggering Events that WOULD NOT Work
- Upon the decision of the Donor (or Trustee) to sell the portfolio of highly appreciated publicly traded securities;
- Whenever the Trustee feels like it;
- Upon the advice of the Donor’s financial advisor, CPA or other fiduciary
Examples of Triggering Events that WOULD Work:
- On the first day of June in the 3rd year after the FLIP-CRT is established;
- Upon the marriage, divorce, death, or birth of a child of the Donor;
- Upon the sale of unmarketable assets that are not cash, cash equivalents, or other assets that can be readily sold or exchanged for cash or cash equivalents
Further Treasury Department Guidance as to Acceptable Triggering Events
In Treas. Reg. §1.664-3(a)(1)(i)(e) the Regulations give seven (7) examples of what an acceptable triggering event might look like. These “safe harbors” should not be considered exclusive in nature.
- Upon the sale of the donor’s former personal residence;
- The sale of securities for which there is no available securities exemption permitting a public sale;
- When the income recipient reaches a certain age;
- When the donor gets married;
- When the donor divorces;
- When the income recipient’s first child is born; and
- When the income recipient’s father dies.
When considering setting up a FLIP-CRUT, it is critical to have the advice of qualified legal and tax counsel.
We invite you to contact a Family Philanthropy Attorney at Ainer & Fraker.
We provide tax and charitable giving services to high net worth clients throughout the Bay Area, and welcome the opportunity to speak with you about your legal needs.