EXAMINING THE FLIP CRUT: FLIP OR FLOP? 2013 MFMER slide-1

Transcription

1 EXAMINING THE FLIP CRUT: FLIP OR FLOP? 2013 MFMER slide-1

2 Introductions Bethel M. Ruest, M.B.A., serves as the Sr. Gift Planning Administrator for the Office of Gift Planning, Department of Development, at Mayo Clinic in Rochester, Minnesota. She leads the gift administration efforts for Mayo Clinic s benefactors and friends living across the United States. MPGC Board Member Adam C. Watts, J.D., serves as Gift Planning Officer for Mayo Clinic s Office of Gift Planning, West Region. He partners with the West Region development office to strategically cultivate planned gifts, and works directly with benefactors to help them achieve their philanthropic goals through gift planning MFMER slide-2

3 Mission: Mayo Clinic Office of Gift Planning (OGP) To transform giving at Mayo Clinic by providing expertise in the presentation, negotiation and administration of deferred and complex gift arrangements. How We Do It: Mayo Clinic s OGP has a team of dedicated philanthropic professionals to create personalized, strategic gift structures. These unique gifts help our benefactors honor loved ones, leave a lasting legacy, and better plan for the future with valuable tax benefits and income streams. We help transition complicated assets into meaningful philanthropic support MFMER slide-3

4 Mayo Clinic Office of Gift Planning (OGP) How We Do It: One-on-one consultations; Estate planning assistance; Comprehensive gift calculations; Guidance in choosing the right gift vehicle, including charitable trusts, gift annuities, and donor advised funds; Ability to handle complex gifts such as closely-held stock, real estate, and tangible personal property MFMER slide-4

5 Mayo Clinic Office of Gift Planning (OGP) Who We Are: Committed, knowledgeable staff; Gift Planning Officers in 3 states (MN, FL, AZ); A seasoned team which includes licensed attorneys, a licensed realtor, and a certified public accountant; Experts in Gift Administration Treasury Services: Expert charitable investment management (CGA) which allows Mayo Clinic to consistently achieve a higher than average return on philanthropic investments. External Partners: TIAA Kaspick (Trust) 2013 MFMER slide-5

6 OUR GOAL: AS A RESULT OF THIS PRESENTATION, YOU WILL BE ABLE TO.. Better understand the FLIP CRUT as a gift planning vehicle and its potential benefits to your benefactors and clients; Understand and explain potential pitfalls; Confidently discuss the FLIP CRUT with your benefactors and clients; and Effectively communicate the responsibilities of your organization and your benefactors/clients when establishing a FLIP CRUT MFMER slide-6

7 What is a Charitable Remainder Unitrust (CRUT)? A CRUT is a trust that provides for a specified distribution to one or more beneficiaries, at least one of which is not a charity, for life or for a term of years (not to exceed 20 years), with an irrevocable remainder interest paid to charity. [Treas. Reg (a)(1)(i)] (PDGC) 2013 MFMER slide-7

8 WHAT IS A FLIP CRUT? A FLIP CRUT is a type of charitable remainder unitrust (CRUT). All CRUT rules and polices apply to FLIP CRUTS. Established by the IRS in 1998, A FLIP CRUT is a CRUT: 1) Where the initial unitrust amount to the recipient is the lesser of income or the fixed percentage (net income trust); 2) Where after a triggering event, the unitrust amount changes to the fixed percentage for the trust term. (PGDC) 2013 MFMER slide-8

9 WHY IS IT CALLED A FLIP CRUT? When established, they take the structure of a net income trust, but then FLIP to a standard CRUT for the rest of the trust term. What is a Net Income Trust? A trust that pays the lesser of: (a) an amount which equals a fixed percentage (5%-7%) of the net fair market value of the trust assets as determined on the valuation date for that taxable year, or (b) the trust income for that taxable year. Note: If the trust receives no income = no payments 2013 MFMER slide-9

10 WHEN DOES IT FLIP? The flip occurs in connection with what the IRS refers to as a triggering event. 1) The change (FLIP) from the net income trust to the fixed percentage CRUT is triggered on a specific date or by a single event 2) The FLIP occurs at the beginning of the taxable year that immediately follows the taxable year during which the triggering event/date occurs; 3) Following the flip, the CRUT becomes a fixed percentage CRUT [Treas. Reg (a)(l)(i)(c)] (PGGDC) 2013 MFMER slide-10

11 WHAT IS A TRIGGERING EVENT? Treasury Regulation Sec (a)(1)(i)(d) and (e), and the IRS provide guidance as to what constitutes a permissible triggering event. Among the specific possibilities listed are the sale of unmarketable assets as defined in (a)(7)(ii), or the marriage, divorce, death, or birth of a child with respect to any individual. (PG Calc) The triggering event must be defined in the trust documents when the trust is formed; Most likely the triggering event will be the sale of a non-liquid asset home, machinery, crops, etc MFMER slide-11

12 STEP BY STEP 1. After consulting with their assigned DO, benefactors decide to establish a CRUT to support Mayo Clinic using their largest asset, the vacation home they own together, valued at $1,000,000; Benefactors choose themselves as income beneficiaries; Trust will run for both of their lives and pay 5% of the trust s value annually. 2. Mayo Clinic and its legal counsel draft the trust documents and coordinate the trust s formation/signing; No cost to benefactor; Benefactors may choose to have their own legal counsel draft and/or review the documents. 3. Benefactors serve as initial trustee, during which time it is a net income trust MFMER slide-12

13 STEP BY STEP Trustee pays lesser of the net income (rental income, etc.) or the fixed trust percentage (5% - 7%). No income = no payments. 4. Benefactors obtain a qualified appraisal for the value of the real estate and it is transferred into the Trust; Benefactors receive an immediate charitable deduction based on the expected remainder value of the trust, using the appraised value of the home. 5. Benefactors, as Trustee, market and sell the vacation home at their pace, and at the Trusts cost MFMER slide-13

14 STEP BY STEP 6. Once the real estate is sold, the net proceeds from the sale are received by the trust. 7. The sale of the home is the triggering event, and the trust is flipped from a net income trust to a standard CRUT January 1st of following year. 8. Mayo begins serving as successor trustee. 9. Trustee begins to pay benefactors the fixed percentage (5%) payments for the remainder of the trust s term; Benefactors may make additional contributions to the trust to increase the trust s value. 10. When the term ends, remaining funds are directed to Mayo MFMER slide-14

15 WHY SHOULD YOUR BENEFACTORS/CLIENTS CONSIDER A FLIP CRUT? It allows your benefactors the opportunity to utilize valuable non-liquid assets to fund a CRUT; Benefactors may choose themselves, or others as income beneficiaries children, family members, etc.; Benefactors receive an income tax deduction equal to the trust s remainder value to charity (based on appraised value); Property funding the trust is removed from estate; There is no capital gains tax on gifts to the trust of appreciated assets! 2013 MFMER slide-15

16 WHY SHOULD OUR BENEFACTORS/CLIENTS CONSIDER A FLIP CRUT? Benefactors can add funds to the unitrust whenever they wish; if appreciated assets are added, the benefactors can avoid additional capital gains tax; Mayo Clinic offers benefactors the option of having their trust documents drafted by outside counsel at Mayo s expense; Mayo Clinic serves as successor trustee. Our corporate fiduciary, TIAA Kaspick, invests and administers the trust; 2013 MFMER slide-16

17 POTENTIAL PITFALLS 1. Who Serves as Trustee? Trustee is responsible for management of Trust assets; Real estate marketing and sale of property. 2. Appraisal Protects the benefactors and establishes the amount of their charitable deduction; Needed for Trust accounting purposes. 3. Delay in Payments to Benefactors The FLIP CRUT does not start making payments to the income beneficiaries until January 1 st of the taxable year after the triggering event has occurred; If triggering event occurs early in the calendar year, the first payments could be many months away not an immediate source of income MFMER slide-17

18 PRACTICAL APPLICATION: WHY REAL ESTATE? Many times it is our benefactors most valuable asset; Larger funding asset = larger payments Avoid capital gains taxes; Receive a large charitable deduction to reduce tax bill; Benefactors, serving as trustee, can market and sell the real estate at their pace; Time to secure an acceptable offer, don t have to rush Note: Minimum funding amount using real estate = $125, MFMER slide-18

19 Who Does What? Who drafts the trust documents? Mayo at no cost to the benefactor; Benefactors may choose their counsel to draft documents. Who serves as initial trustee of the newly formed CRUT? Benefactors. Who is responsible for managing, and selling/marketing the funding asset? Benefactors, as Trustees MFMER slide-19

20 Who Does What? Is a qualified appraisal needed? Yes it protects the benefactors and establishes the amount of their charitable deduction. Who is responsible for the scheduling and cost of the qualified appraisal? Benefactors. Who serves as successor trustee once the illiquid asset is sold and the trust is fully funded? Mayo Clinic. Who manages the funds once the trust is fully funded? TIAA Kaspick MFMER slide-20

21 WHY SHOULD DO S FOCUS ON FLIP CRUTS? 1. Large Gifts: Many times a benefactor s largest asset may be in the form of an appreciated non-liquid asset such as a home, farm, machinery, business interest, etc. 2. Versatile Gifts: Mayo has accepted real estate, farm machinery, and even corn. 3. Irrevocable Gifts: FLIP CRUTS are irrevocable deferred gifts 2013 MFMER slide-21

22 We Take Corn! SUCCESS STORY Mayo Clinic recently helped benefactors establish a FLIP CRUT in which corn, soybeans, and farm equipment valued at approximately $500,000 were used to fund the trust. If the benefactors sold the product and machinery, they would have been required to claim the proceeds as income. Reduced taxable income! 2013 MFMER slide-22

23 HOW IT WORKED Corn, Soybeans & Farm Equipment $500,000 Income Beneficiaries Usually the benefactors Benefactors Age 75 Residuum 6% Charitable Remainder Unitrust Income Stream Net income only until assets sold. Then 6% of annually revalued trust assets. Annual distributions fluctuate with market value. Approximately $31,500 in year one MFMER slide-23

24 Partnership Interest SUCCESS STORY Mayo DO worked with benefactors (brothers) to establish two separate FLIP CRUTs utilizing their largest asset: A business partnership that owned a multifamily property in Las Vegas; Benefactors served as initial trustee and controlled the sale waited for an acceptable offer; Property sold for $3,600,000; Product of extensive teamwork between DO, OGP, and external partners (Kaspick, legal counsel). Extensive communication/negotiation with the benefactors; Example of flexibility and versatility of the FLIP CRUT MFMER slide-24

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26 CONCLUSION: FLOP 2013 MFMER slide-26

27 Questions & Discussion 2013 MFMER slide-27