San Francisco, CA – (800) 775-7612 – In a prior post, we looked at the FLIP-CRUT concept in which a Charitable Remainder Trust begins as as a Net Income Charitable Remainder Trust, and after a “Triggering Event”, changes and becomes a Standard Charitable Remainder Trust with a fixed Unitrust or Annuity distribution.
We also looked at relevant Treasury Department definitions of Triggering Events, which are judged not to be subject to the control of the Trustee or another person.
Among the most common instances of Triggering Events is the sale of Unmarketable Assets, for example, the sale of a Personal Residence, or any other real or commercial property, securities or various business holdings that are not publicly traded, and do not have any sort of public marketplace to value and sell.
In Treasury Regulations § 1.664-1(a)(7)(ii), the interpretation 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. Unmarketable assets include real property, closely-held stock, and an unregistered security for which there is no available exemption permitting public sale.
Why this definition is essential when using a FLIP-CRUT to sell appreciated real estate.
A Charitable Remainder Trust is an excellent way to postpone the tax on sale if you possess a piece of real estate that has appreciated in value, so that selling it outright would result in significant capital gains.
The IRS will unfortunately prohibit the deduction based on the Step Transaction Doctrine if you donate the real property to a Charitable Remainder Trust once an irrevocable commitment to sell already exists.
On the other hand, placing real property in a Standard Charitable Remainder Trust – which has a fixed yearly commitment to pay the income to the Grantor – may also not be feasible.
A Standard Charitable Remainder Trust will not get the job done, if the real property takes takes a good amount of time to sell (surely more than a year).
This is why the Treasury Departments inclusion of Real Property as not readily marketable is critical. It allows you to donate the property immediately, take the appropriate deductions, and after that convert to a Standard Charitable Remainder Trust after there is sufficient liquidity (post-sale) to fulfill the yearly distribution requirements.
The FLIP-CRUT is really the best vehicle when offering for sale appreciated assets that are not readily marketable, such as real estate.
Connect with a Family Philanthropy Attorney at Ainer and Fraker 800-775-7612 right now to find out how you can take advantage of the incredible tax benefits of a FLIP-CRUT.