As reported in the February and March issues of Give & Take this year, there are new IRS regulations regarding “flip trusts.” Under the terms of a flip trust, a net income unitrust can “flip” and become a straight rate payout unitrust. The new IRS regulations now allow this flip to occur in the year following a “triggering event” that the donor has no control over, such as a specific date, a birth, or a marriage. For those who want to take advantage of the opportunity to convert net income unitrusts into straight rate payout unitrusts, trust reformation proceedings must be started by June 8, 1999.
In many cases it will be beneficial for both life income beneficiaries and charitable remainder organizations to convert to a straight payout unitrust. In cases where net income trusts are paying out only 3 or 4% in the form of ordinary income from a 6% net income unitrust, a conversion to a straight unitrust would result in payments equal to 6% of the value of the trust each year, with the possibility that much of the additional income taxed at lower capital gains tax rates under the so-called tier structure of income reporting. The charitable remainder portion may be more likely to grow as well if the trustee then reinvests for total return including capital appreciation that might not have been possible under the asset allocations that were more appropriately weighted toward debt instruments when the trust was operating as a net income trust.
For more information on flip trusts and a complete listing of the new IRS regulations regarding them, please click here.