A flip unitrust blends two types of trusts for greater flexibility. The trust functions as a net income trust until a specified event (or trigger) occurs, such as a birth, death, or the sale of a hard-to-market property.

On January 1 following the specified event, the net income trust converts or “flips” into a standard unitrust. This type of trust functions well for liquid assets such as real estate or other assets that are hard to value.

How it Works

Mary Jones owned real estate that she inherited 20 years ago from her parents that was now valued at $300,000. She and her financial advisor discussed her options and Mary learned that she could create a flip unitrust that would pay her 7 percent each year.

Mary’s financial advisor helped her transfer her property into a flip unitrust and specified that the trigger event would be the sale of the property. Until the trust had sold Mary’s property (which triggers the “flip”), the unitrust would remained a net income with makeup trust (include link back to charitable remainder trust page which explains this).

Mary’s property sold after two years. On January 1 after the sale, the trust "flipped" and became a standard unitrust. Under the guidelines set up by the trust, the proceeds of the sale were invested and Mary began to receive her 7 percent income. Also, because the trust was earning more than 7 percent on its investments, it made up part of the income that had not been paid to Mary prior to the sale of her property (a feature which is part of the original net income with makeup trust – include link).

Over Mary's lifetime, and as long as there are sufficient assets in the trust, Mary will receive $21,000 a year. She received a charitable tax deduction in the year she established the trust and also avoided capital gains tax on any appreciation of the property.

Additionally, creating the flip unitrust allowed Mary to provide a potentially large charitable gift for a charity that was very meaningful to her, something she had always hoped she would be able to do.

Flexibility

A flip trust provides flexibility especially if you have hard to value or non-liquid assets. A flip trust can also be managed so that non-liquid assets may be sold without capital gains tax liability, so that the proceeds can be reinvested in a balanced portfolio and life income payments can be paid to you and/or a beneficiary.

There will probably be expenses associated with a trust, especially a trust involving real estate (taxes, insurance, maintenance, etc.). Before your trust generates income, you may need to fund these expenses.

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