A Flip CRUT is one of the best tools you can use to provide for yourself and your family once you hit the golden age of retirement, however very few people know about it. Financial instability does not have to define the late years of your life. With this type of charitable remainder unitrust on deck, you can pull a steady and often substantial income with minimal effort and many tax advantages. And if you’re wealthy, all the better.
How does a Flip CRUT work when it comes to planning for your retirement?
Let this guide help you decide if a Flip CRUT is the right move for your financial planning.
What is a Flip CRUT?
A Flip CRUT is a little more complex than your standard charitable remainder trust that you may have been considering. Instead of being its own thing, it transitions between two popular trust types. It starts as a Net Income with Make-Up Charitable Remainder Unitrust (NIM CRUT) and then will “flip” to a traditional CRUT.
But why would you want to consider a Flip CRUT over choosing one of the other two trusts?
Starting with a NIM CRUT allows you to have a bit more control over the distribution of assets from your trust, thus keeping your tax rate at a minimum while you still work. You can pull distributions from them only when there is income to withdraw, meaning you can choose to hold onto assets until a later date if you want to defer your immediate payout. The amount of money you “owe” to yourself in distributions can be made up in later years. This is the “make-up” part.
Once the trust flips, you get the benefit of steady distribution payments. You never have to guess at what your earnings will be. The trust will function like a well-oiled machine, selling assets as it needs to in order to make those annual payouts while earning interest on other assets.
What Can Trigger a Flip CRUT?
With all of this in mind, you might be wondering how you decide that the trust should flip from a NIM CRUT to a CRUT. The reality is quite simple: You simply decide when you want to transition from one to another when you set up the trust.
For example, you can set it to flip by a date, such as the date that you intend to retire.
Other flip events include selling a specific asset or security, selling real estate, reaching the right age, getting married or divorced, having a child, or losing a partner.
With all these potential flip triggers in mind, it is important to highlight what they all have in common. Namely, the triggering event is outside the realm of your control. Losing a spouse and having a child are both events that are outside of your personal control. Well, at least according to the IRS.
When you set up the Flip CRUT, you will need to take some time to seriously consider when you will need the steady income that the CRUT promises. Then, you can write the trigger to meet those needs and start to draw an income from it more reliably than you could with a NIM CRUT.
Flip CRUT Example Scenario
Suppose you want to set up a Flip CRUT for your heavy investment in the stock market. You have purchased $50,000 in shares of a growing tech company, and they have paid off well with a current value of around $2.5 million. Instead of selling them and being hit with capital gains taxes, which could reduce your principal by 40% or more, you place them in a Flip CRUT with a trigger set for the year you turn 65 and plan to retire.
Initially, your trust acts as a NIM CRUT. You may choose not to pay yourself the full amount of your annual distribution because you want to hold those assets rather than liquidating them. This is fine for now, allowing you to grow the value of the trust until the year you turn 65.
During this year, the trust flips and starts to give you the established distribution. It may start to sell off assets to make that income a reality. In the end, you will give roughly ten percent to the charity or charities you selected upon setting up your charitable remainder unitrust.
Best Uses for a Flip CRUT
While it may seem clear now that a Flip CRUT is great to plan for retirement savings, it is equally important to understand its other uses. Any time you want to have a set income and distribution at a later date, defer taxes until a later time, a Flip CRUT might be the right choice.
For example, a Flip CRUT could be established to trigger the flip upon your death. This would allow you to take the tax advantages now, get assets out of your estate, and allow them to keep growing until you pass. At this point, the CRUT would give distributions to your surviving spouse, children, or any other loved one who may have been dependent upon you. For larger estates, this is often an excellent choice that is terribly underutilized.
Another way to utilize Flip CRUTs is to cover a future expense for children or grandchildren. You may want to help with their college savings, but worry you will not be around when they enroll in higher education. Instead, you can set the flip event to a specific date when they will be older and can make good use of the gift you are giving them.
If you know there will be a point in the future where you or a loved one could use the steady draw of money coming from a charitable remainder trust but can live without it for now, a Flip CRUT is a great option. CRTs in general are very customizable and can provide benefits that you may not have thought possible. In fact, there is a very good chance you will think it’s “too good to be true.” This is – hands down – the one comment we hear again and again.
Chart Your Course with Magellan
Not sure if a Flip CRUT can help you reach those financial goals you have for your life? Magellan can help you with comprehensive estate, legal, financial, and tax planning all under one roof. We specialize in charitable remainder trusts and get you the help you need to get ahead on estate planning. Reach out to us today to book your consultation!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.