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Q & A: Receiving an Income for a Charitable Gift of Real Estate – the FLIP Charitable Remainder Unitrust

By: Judi Tichenor, J.D., Executive Director, Rice Office of Gift Planning

Q: What is a FLIP Charitable Remainder Unitrust?

A: A FLIP Charitable Remainder Unitrust, also known as a FLIP-CRUT, is a type of irrevocable charitable trust that allows you to use a hard-to-liquidate asset, like a piece of real estate, a valuable work of art, etc. to fund a charitable trust that will produce income payments for you once the asset is sold and the net proceeds fund the trust. The trust can last for one or more lifetimes, a term of years, or both. Once the last beneficiary no longer needs the trust or the trust term ends, the remainder will benefit a qualified charity, in our case, Rice University.

Q: How does it work?

A: Anyone who owns real estate or valuable personal property can work with Rice Trust Inc. or their own attorney to set up a FLIP-CRUT. When it comes to overseeing the trust, you can name yourself as trustee and take the responsibility of managing the property while it is in trust, or you can use Rice Trust Inc. or another trustee to oversee the direction of the trust. Whomever you choose, be sure they are truly familiar with the rules of trusteeship and the associated tax regulations and filings. To ensure the trust is properly funded, the property deed must be transferred to the trust, naming it the stated owner. This trust is irrevocable, and once established, cannot be terminated until the passing of the last beneficiary, the end of the term or both, depending on how the trust is drafted.

Q: What happens once the trust owns the property?

A: The trustee will begin the selling process, hiring a real estate agent or other professional familiar with the type of property, who will then put it on the market. The closing date is usually considered the date the trust “flips” to a standard payout to the life income beneficiaries.

Q: Does the trust donor/grantor have to give additional funds to the FLIP-CRUT at any point?

A: When real property is transferred to a FLIP-CRUT, the property may not generate any (or enough) income to cover routine expenses (taxes, insurance, maintenance, etc.) that may be incurred prior to the sale of the property. In those instances, the trustee may request that the donor make an additional contribution to the trust in the form of cash to cover such expenses.  As with the initial contribution of property, any additional contribution would be irrevocable and would qualify for a partial income tax deduction.  

Q: How long does the gifted property have to stay in the trust after it has been deeded over to the trust?

A: There is no required time period for the piece of real estate or personal property to remain in the trust before it is sold. You just need to be sure there are no “prearranged sales” set up for the property before the property goes into the trust. For instance, the IRS frowns upon the trust grantor signing a contract of sale for the property with a buyer before granting it to the trust. First the property goes into the trust, and then the property goes on the market with the trust as the owner and the trustee performing the sales negotiation. Arranging for a sale before granting the property to the trust is seen as an effort to evade taxes.

Q: How does the grantor receive a charitable tax deduction for a gift of property to a FLIP-CRUT?

A:  Since the charitable remainder unitrust offers benefits like payments for life or for a term to living, non-charitable beings, the trust provides a partial charitable income tax deduction for the gift to the trust. There also can be tax-free portions to the life income payments for a certain period of time, and similarly, there will be partial avoidance of capital gain tax for making the gift of appreciated property to a charitable remainder unitrust. The life income and other tax benefits can all be illustrated for you before setting up the trust, with a final version created once the property has been sold AND has received a qualified appraisal of its value. The partial charitable income tax deduction is based on the appraised value of the property (required by the IRS) and the applicable federal discount rate used for charitable trusts.

Q: Can the date the trust “flips” be something other than the date of sale of the property within the trust?

A: Yes! The flip date can be a future birthday, retirement, anniversary or any date that is definable and finite. The flip date cannot be something like: “when my first-born grandchild arrives” or anything that is intangible and might not happen. The trust language can even offer options for a flip date, such as “when I turn age 70 or the date of my full retirement, whichever comes first.” The trust can sell the property any time, regardless of the flip date. If the sale is made before the flip date, the life income beneficiary will begin receiving net income payments from the trust until the flip date, at which point it will convert to a standard unitrust and begin paying out income at the agreed upon rate, usually 5%, but can be higher depending upon ages and the number of life income beneficiaries.

Q: Does Rice offer the opportunity to set up a FLIP Charitable Remainder Unitrust with a piece of property?

A: Yes, Rice Trust Inc. and the Office of Gift Planning are delighted to work with Rice alumni, parents and friends to help set up this kind of unitrust with either a gift of real estate or another valuable complex asset. The Office of Gift Planning will prepare one or more sample illustrations to demonstrate how the unitrust would likely work with your circumstances and asset gift, and, if named as trustee, Rice Trust Inc. will pay for the drafting of the unitrust document and transfer of deed without charge or cost to the trust grantor.

Q: Doe Rice have to receive all the remainder to have Rice Trust Inc. named as trustee?

A: No, but Rice does require that it be named as no less than a 50% remainder beneficiary of the unitrust. You may name one or more charities to receive all or a portion of the other 50% of the remainder.

Questions? For more information or a personal illustration on a FLIP Charitable Remainder Unitrust, please contact Judi Tichenor in the Rice Office of Gift Planning at 713-348-4624 or [email protected].

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