Contents

CHARITABLE REMAINDER TRUSTSthe amount required to be paid from the entire trust in accordance with legalrequirements. The IRS wrote:For example, in some taxable years of the trust, it is possible that one part ofthe total trust assets will earn little or no income while the other part of thetotal trust assets will earn income exceeding 5 percent of the net fair marketvalue of its assets. Thus, under the income exception form of payment and inaccordance with the provisions of the trust instrument that directs the separateoperation of the two equal parts, the total payments in some taxableyears, which consist of the trust income of one part limited by the amount ofincome earned plus the trust income of the other part limited by the amountthat is not more than the designated fixed percentage of the net fair marketvalue of that part’s assets, could be less than the total of all trust incomeearned by the entire trust assets and required to be distributed by the trustee[under these rules]. 154These provisions precluded the trust from qualifying as a NICRUT.Net-Income Make-Up Charitable Remainder Unitrust. The other of theincome-exception type of CRUT is similar to the NICRUT, except that the trustinstrument provides that, for the years in which there was no or an insufficientdistribution (in relation to the 5 percent standard), the trust can, once the investmentpolicy generates adequate income, not only begin to pay the income interestbeneficiary or beneficiaries the full amount of the determined unitrustpayments, but also make payments that make up for the distribution deficienciesin prior years. 155 This type of trust can thus make catch-up—or make-up—payments once the non-income-producing asset is sold. Thus, in this situation,the unitrust is determined under the net-income method, with that amount alsoincluding any amount of income that exceeds the current year’s fixed percentageamount to make up for any shortfall in payments from prior years when thetrust’s income was less than the fixed percentage amount. This net-income makeupCRUT is the NIMCRUT. 156Flip Charitable Remainder Unitrust. The fourth type of CRUT is the flip unitrust(FLIPCRUT). The governing instrument of a FLIPCRUT provides that theCRUT will convert (flip) once from one of the income-exception methods—theNICRUT or NIMCRUT—to the fixed percentage method—the SCRUT—for purposesof calculating the unitrust amount. 157 The conversion is allowed, however,only if the specific date or single event triggering the flip—the triggering event—is outside the control of, or not discretionary with, the trustee or any other personor persons. 158Permissible triggering events with respect to an individual include marriage,divorce, death, or birth. 159 The sale of an unmarketable asset, such as real154 Rev. Rul. 76-310, 1976-2 C.B. 197.155 IRC § 664(d)(3)(B).156 Reg. § 1.664-3(a)(1)(i)(b)(2).157 Reg. § 1.664-3 (a)(1)(i)(c). Prior to the 1998 law change that permits a FLIPCRUT, the law was that the typeof CRUT could not be changed once it was selected. This rule was designed to prevent possible manipulationof the trust assets to the detriment of the charitable organization with the remainder interest. In one situation,a CRUT was reformed so that it was changed from a SCRUT to a NIMCRUT; the IRS ruled that this alterationin the unitrust amount payment method caused the trust to cease to qualify as a CRUT. Priv. Ltr. Rul. 9506015.158 Reg. § 1.664-3(a)(1)(i)(c)(1).159 Reg. § 1.664-3(a)(1)(i)(d). 430