Flip CRUT: Definition, Comparison & Examples • Learn with Valur

Life comes at you fast, and your financial needs may look very different today than they will a decade from now. With a Flip CRUT (Flip Charitable Remainder Trust ), you can plan in advance to change your trust’s format during its term. This strategy can give you the withdrawal flexibility of a NIMCRUT in the short term and the payout consistency of a Standard CRUT in the long term.

What Is A Flip CRUT?

As you likely know by now, Charitable Remainder Unitrusts (CRUTs) is a form of a tax-deferred account, like an IRA, designed to incentivize charitable giving in exchange for significant tax benefits: tax deferral and the ability to lower your tax rate via income smoothing.

A Flip CRUT, or a Flip Charitable Remainder Unitrust, actually starts as NIMCRUT and then it “flips” to a Standard CRUT. It allows you to have more control over distributions initially, a characteristic of NIMCRUTs, and later benefits from the consistent distributions of a Standard CRUT. You might be wondering, “What does it look like in practice? and when do people use this structure?”.

If you’re not familiar with the dynamics of Standard CRUTs and NIMCRUTs, it would be a good idea to take a spin through our posts on them. Understanding the fundamentals is necessary to fully acknowledge why a Flip CRUT could make sense for you.

How Does a Flip CRUT Work?

While many of these steps may look familiar to other types of CRUTs, about half the steps are different due to the added dynamic of the flip provision.

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.
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. So you’ve decided you’d like a distribution. What now? The pre Flip. 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. This is the post Flip step**.** With a standard CRUT, this is a fixed percentage of your trust’s assets every year no matter what.
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.

When Are Flip CRUTs Suitable?

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 initially maximize your returns for now with the NIMCRUT’s flexible distribution structure, 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:

Illiquid Assets: You have an illiquid asset — like startup equity or real estate — and you don’t know when it’s going to pay out; if you want consistent payouts in the future, 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 be possible.
Hedging: 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.
Changing Financial Situation: 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.

Flip CRUT vs NIMCRUT: Why Are They Different?

To help illustrate how a Flip CRUT is different from NIMCRUTs, we will walk through how each trust would work on some common Flip CRUT scenarios. 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.

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 might be forced to sell the shares when you didn’t want to or at a low price. And how could you solve this problem?

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. But critically with a NIMCRUT it can only distribute realized income so you may not be able to get consistent distributions every year.

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, or after a specific time period, you take a larger distribution and then “flip” to a standard CRUT and receive consistent distributions irrespective of the returns in the trust.

What Is A Flip Triggering Event?

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, real estate or collectibles like a rare coin)
When you sell your residence
When you reach a specific age
When you get married or divorced
Upon the birth of a child
Upon the passing of a partner or parent.

The constants here are that, first, triggering events must not be “under the control of” the donor (you) or any other person. And second, Flip triggering events are typically designed to convert your trust to a Standard CRUT when you think you’ll need to start taking steady payments from your trust. Effectively this means that you can decide what sort of event would cause the trust to flip, but you cannot typically dictate or change the precise timing after the trust is formed.

Next Steps

In short, although everyone’s preferences and circumstances are different, this structure can be a good fit for customers who want to initially benefit from the NIMCRUTs distribution control to grow their assets faster but want to lock in steady payouts in the future at the expense of potentially higher returns.

If you want to evaluate the potential return on investment, access our CRUT calculator, or set a call with our team of experts.

About Valur

We have built a platform to give everyone access to the tax planning tools of the ultra-rich like Mark Zuckerberg (Facebook founder), Phil Knight (Nike founder) and others. Valur makes it simple and seamless for our customers to utilize the tax advantaged structures that are otherwise expensive and inaccessible to build their wealth more efficiently. From picking the best strategy to taking care of all the setup and ongoing overhead, we make take care of it and make it easy.