Flip CRUT: How It Works for High-Net-Worth Individuals

For high-net-worth individuals who want to optimize charitable giving and secure stable income, a Flip CRUT (Flip Charitable Remainder Unitrust) can be a great solution.

This specialized trust allows you to donate appreciated assets to charity, receive tax benefits, and create a flexible income stream that adapts to your changing financial needs. Here's everything you need to know.

What Is a Flip CRUT?

A Flip CRUT is a specialized charitable trust that operates in two distinct phases. Initially, it pays out only the actual income earned by the trust assets.

Then, after a specific "triggering event" occurs (such as retirement or the sale of an unmarketable asset), the trust "flips" to function as a standard CRUT, paying a fixed percentage of the trust's value each year regardless of its actual income.

This two-phase approach makes Flip CRUTs appealing to high-net-worth individuals who want to donate illiquid assets like real estate or privately held business interests while deferring income until a later date.

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How Does a Flip CRUT Work?

A Flip CRUT operates through a distinctive two-stage process. This is the main difference that sets it apart from other charitable trusts.

First Phase: Income-Only Period

During the initial phase, the trust functions as an income-only arrangement. You establish the trust by selecting your income beneficiaries - typically yourself, your spouse, or your children. The trust begins as a net income trust, meaning you'll only receive the actual income generated by the assets. This income could be minimal for non-income-producing property.

The unique aspect of a Flip CRUT is that you must establish a specific triggering event when you create the trust.

Common triggers include:

Sale of a particular property within the trust
Reaching retirement age
A specific calendar date
Other predetermined life events

While waiting for this trigger, you've already received your income tax charitable deduction. During this phase, the trust can sell appreciated assets without incurring capital gains tax. This allows the full proceeds to remain in the trust for investment and growth.

Second Phase: After the Flip

Once the trigger event occurs, the trust permanently transforms into a standard CRUT. This change means you'll now receive a fixed percentage payout of the trust's value annually, regardless of its actual income. This predictable income stream continues for the remainder of the trust term.

The second phase provides consistency and reliability to your income flow, which can work especially well if you're using the trust as your retirement income.

At the end of the trust term (typically the lifetime of the beneficiaries), the remaining assets transfer to your selected charitable organizations. This generous gift is what justifies the tax advantages you've received throughout the life of the trust.

Pros of a Flip CRUT

A Flip CRUT has a few important advantages:

Immediate tax deduction: You get a charitable tax deduction in the year you fund the trust, even though the charity receives the money years later.
No capital gains tax: When the trust sells appreciated assets, it pays no capital gains tax. This way, your entire investment continues to grow.
Income flexibility: The flip unitrust structure gives you minimal income during the first phase but reliable income after the triggering event, which works well for retirement planning.
Gift planning: You can make a meaningful impact by supporting charitable causes important to you, but still receive payments during your lifetime.

If you own highly appreciated but non-income-producing assets (like undeveloped real estate or growth stocks) and want to convert these assets into reliable income for retirement, a Flip CRUT can be a good trust option for you. The structure of a Flip CRUT also benefits high-net-worth individuals who don't need income now but anticipate needing it at a specific date, such as retirement.

Related Article | At What Net Worth Do I Need a Trust?

Cons of a Flip CRUT

Flip CRUT also has certain limitations to consider:

Irrevocable trust: Once you transfer assets into the trust, you can't change your mind and take them back. The decision to start a Flip CRUT is irreversible.
Limited access to principal: You'll begin receiving income payments, but won't be able to access the principal amount once it's in the trust.
Inflexible trigger events: The triggering event must be outside your control or a specific date/age; you can't simply decide when to flip the trust.
No inheritance for heirs: The assets you place in the trust won't go to your children or other heirs; they'll go to charity.

A Flip CRUT likely won't work for you if you need immediate access to your full capital or might need emergency access to principal in the future. It's also not a good choice for high-net-worth individuals who want to pass inheritance down to their heirs.

Additionally, the Flip CRUT structure doesn't make sense for people who need a guaranteed income amount during the initial phase, since income payments before the flip are limited to what the trust earns.

Related Article | How to Pass Money to Heirs Tax-Free

What Is an Example of a Flip CRUT?

Let's say you own an undeveloped piece of land worth $1 million that you purchased years ago for $200,000. You want to retire in five years and need income then, but not now. You also want to support your favorite charitable cause.

You place this land into a Flip CRUT with a trigger set for your 65th birthday in five years.

In the first year, you receive a charitable tax deduction of approximately $100,000 (the exact amount depends on current IRS rates and other factors). The trust sells the land for its full $1 million value without paying the $160,000 in capital gains tax you would have owed personally.

For the next five years, the trust invests the $1 million, but since you structured it as an income-only trust in the first phase, you receive only the actual income generated, maybe minimal amounts of interest and dividends.

On your 65th birthday, the flip occurs. Now the trust begins paying you 5% of its value annually, regardless of its actual income. If the trust has grown to $1.2 million, you'll receive $60,000 that year. These payments continue for your lifetime and adjust each year based on the trust's value.

When the trust terminates, the remaining assets go to your chosen charity.

Flip CRUT vs NIMCRUT

Both Flip CRUTs and NIMCRUTs start as income-only trusts, but they follow different paths as they mature.

Flip CRUT: Initially works like a NIMCRUT and pays only actual income earned. After a predetermined triggering event (like selling a business or reaching retirement age), it permanently converts to a standard CRUT. This means you'll receive a fixed percentage of the trust's value each year, regardless of what income the investments generate. The flip provision gives you certainty and consistency once activated.
NIMCRUT: Remains an income-only trust. It only distributes actual realized income, up to the stated percentage. When income falls short, the difference accumulates in a "makeup account" that can be distributed in future years when the trust earns more than the stated percentage. This structure gives you ongoing control over when you receive income.

The main Flip CRUT vs NIMCRUT difference is that a Flip CRUT changes its fundamental distribution method after the triggering event. A NIMCRUT has the same income-only approach throughout its life.

Choose a Flip CRUT when you want minimal payouts during an initial period, followed by reliable, consistent income after a specific event, regardless of investment performance.
Choose a NIMCRUT when you want long-term flexibility to control income timing throughout the trust's existence by managing when and how the trust realizes income.

Related Article | What Is a Dynasty Trust and How Does It Work?

FAQs

What Is a Flip Trust?

A Flip Trust is simply another name for a Flip CRUT (Charitable Remainder Unitrust). It's a specialized charitable trust that starts by paying only the actual income it earns and then "flips" to paying a fixed percentage of its value after a specific triggering event occurs. This dual-phase structure makes it particularly useful for people who want to donate appreciated assets now, get tax benefits immediately, but defer receiving significant income until a future date, like retirement.

What Is a Flip Triggering Event?

A flip triggering event is the predetermined circumstance that causes a Flip CRUT to change from its initial income-only phase to its standard CRUT phase. This event must be outside the beneficiary's control or be a specific date. Common triggering events include the sale of a particular asset held by the trust, reaching a certain age (like 65), a specific calendar date, or marriage. Once this trigger occurs, the trust permanently converts to paying a fixed percentage of its value annually.

What Is the Difference Between CRUT and Flip CRUT?

A standard CRUT (Charitable Remainder Unitrust) pays a fixed percentage of its value annually from day one, regardless of the trust's actual income. A Flip CRUT, however, starts by paying only what income it generates and then converts to the standard CRUT payment method after a predetermined triggering event. This difference makes Flip CRUTs a better option for non-income-producing assets like vacant land or growth stocks, especially when you don't need immediate income but want tax benefits now.

The Bottom Line

There are many types of Charitable Remainder Trusts to choose from, including a Flip CRUT. This specialized trust's two-phase structure gives you flexibility during the initial period and reliability after the triggering event.

That said, it's not appropriate for everyone due to its irrevocable nature and other features. Make sure to consult with a qualified tax and legal advisor to determine if a Flip CRUT is a good option for your financial goals.