The Benefits of Funding a Flip CRUT with Real Estate

Real estate often represents one of the most appreciated (and illiquid) assets in your client’s net worth. For many of your clients, selling real property can trigger substantial capital gains taxes, depreciation recapture, and surtaxes that significantly erode net proceeds.

At the same time, some of your clients may be approaching a point where active property maintenance is no longer desirable, income needs are changing, or philanthropic goals are becoming more important. A Flip Charitable Remainder Unitrust (Flip CRUT) funded with real estate can uniquely address all these concerns in a single, highly effective planning strategy.

What Is a Flip CRUT?

It's OK to admit if you’ve never heard of a Flip CRUT. I learned the basic concept of a charitable remainder trust in one of my elective tax law courses in law school, but I honestly couldn’t tell you anything beyond the very basics of charitable trusts until I was well into my legal career and working as a Planned Giving Officer.

A Flip CRUT is a specialized form of charitable remainder unitrust that begins as a Net Income with Makeup CRUT (NIMCRUT) and later “flips” to a standard unitrust upon the occurrence of a triggering event. Common flip events include the sale of an illiquid asset (such as real estate), a stated date, or another permissible event defined in the trust document.

Before the flip, distributions are limited to actual trust income. After the flip, the trust pays a fixed percentage of its annually revalued assets, regardless of income. This structure is particularly well suited for real estate, because it accommodates an initial period of illiquidity while preserving the long-term income benefits of a traditional CRUT.

Deferral (and Potential Avoidance) of Capital Gains Tax

One of the most powerful benefits of funding a Flip CRUT with appreciated real estate is the ability to sell the property inside the trust, rather than personally. Because a properly structured charitable remainder trust is generally exempt from federal income tax, the trust can sell the real estate without immediately recognizing capital gains.

Instead of paying tax at the time of sale, the gain is effectively deferred and later recognized gradually by the income beneficiary as distributions are received under the four-tier accounting system. This allows donors to convert highly appreciated, tax-inefficient property into a diversified investment portfolio while keeping more capital working for income and growth.

Income Flexibility During the Transition Period

Real estate is often illiquid and may produce uneven or modest (if any) net income relative to its market value. During the pre-flip phase, the Flip CRUT operates as a NIMCRUT, meaning distributions are limited to actual trust income. This prevents the trust from being forced to distribute cash it does not yet have and allows the trustee to manage the property, collect rents, and prepare the asset for sale without distribution pressure. Once the triggering event occurs (most commonly the sale of the real estate) the trust flips to a standard unitrust. At that point, the donor begins receiving a predictable annual payout based on a fixed percentage of the trust’s value. This creates a smooth transition from illiquid property ownership to reliable retirement income.

Immediate Charitable Income Tax Deduction

When a donor contributes real estate to a Flip CRUT, they are entitled to an immediate charitable income tax deduction equal to the present value of the remainder interest ultimately passing to charity. The deduction is based on IRS-prescribed assumptions, including payout rate and life expectancy, and can often be substantial.

This deduction may be used to offset income in the year of the gift and carried forward for up to five additional years, making it especially valuable for donors who are facing unusually high income due to business sales, large required minimum distributions, or other liquidity events.

Relief From Active Property Management

For many donors, the appeal of a Flip CRUT extends beyond taxes and income. Managing real estate can be time-consuming and stressful, particularly as owners age or as properties require significant maintenance. After the real estate is sold and reinvested, the donor enjoys passive income without the responsibilities (and liabilities) that come with direct property ownership. This often can be a deeply meaningful benefit for long-term owners.

Alignment of Income Planning and Philanthropy

At the conclusion of the trust term – typically at the donor’s death or the death of another income beneficiary – the remaining trust assets pass to one or more qualified charities. This allows donors to make a significant charitable gift using the portion of wealth that would otherwise be lost to taxes or depleted by inefficient liquidation.

In many cases, donors find that a Flip CRUT allows them to give more to charity while receiving more income during life than they could have achieved through an outright sale and re-investment of the property.

The trust structure transforms a highly taxed asset into a legacy-driven solution.

Ideal Candidates for Real Estate Funded Flip CRUTs

Flip CRUTs funded with real estate are particularly attractive for donors who:

• own highly appreciated, debt-free property;
• anticipate a future sale but not an immediate one;
• desire income in retirement rather than current cash flow; and
• have philanthropic intent.

They are commonly used with rental properties, commercial buildings, undeveloped land, and even vacation homes that the family doesn’t need.

As with all advanced planning strategies, careful coordination with legal, tax, and charitable planning professionals is essential. When designed and implemented properly, a Flip CRUT can convert a complex real estate challenge into a tax-efficient income solution with lasting charitable impact.

Disclaimer: This article is intended to be general information for educational purposes only. It is not intended to provide legal, tax, or financial advice.

About the Author

Aaron Westlake, JD is a Senior Charitable Estate Planning Advisor at the American Heart Association. Aaron is based in St. Augustine, Florida and serves AL, FL, GA, LA, MS, NC, SC, TN, and PR.

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