Tax planning can be intimidating for small business owners. But it’s important to understand the different options available to you to minimize your tax bill and keep more of your revenue.
Charitable Remainder Unitrusts (CRUTs) are similar to Individual Retirement Accounts (IRAs). CRUTs defer your tax obligations on capital gains to encourage charitable contributions. Because your gains are taxed only when you pull your money out of the CRUT, you can keep your money in the trust for years. This can lead to lower taxes through income smoothing- giving you more room to make financial moves and grow your business.
But what if you need even more flexibility?
That’s where Flip CRUTs come in.
In this article, we take a deep dive into Flip CRUTs and how they work. We’ll explain the benefits of a Flip CRUT for small businesses and dispel any myths about this type of trust.
What is a Flip CRUT?
Flip CRUTs are one type of CRUT, along with the standard CRUT and the Net Income with Make-up Charitable Remainder Unitrust (NIMCRUT).
A Flip CRUT starts as a NIMCRUT for the first few years. This means it only pays out the interest earned on the trust’s assets, not the principal. The trust is designed to be tax-efficient, so you don’t pay any taxes on the money you put into it or on the income it generates. After a set number of years, the Flip CRUT shifts to a standard CRUT. This means it starts paying out the principal as well as the interest.
How does a Flip CRUT work? There are nine steps:
- Select an asset
- Choose a beneficiary
- Set the flip trigger for your CRUT- this can be a specific date or event, like the sale of a property or when a child is born
- Transfer your selected assets and get an instant charitable deduction, typically around 10% of your chosen assets’ value
- Sell your assets without your trust paying having to pay any taxes
- Decide whether to take your annual distribution or not
- Flip your NIMCRUT to a standard CRUT
- Once your NIMCRUT flips to a standard CRUT, you will have to make an annual withdrawal henceforth
- The remainder of the trust after it ends is allocated for charitable donations.
When Does a Flip CRUT Make Sense for a Business?
The goal is to make sure that you’re taking full advantage of the tax benefits available to you.
A Flip CRUT can be a great option if flexibility is your main concern.
The main benefit of a NIMCRUT is its typically higher ROI compared to standard CRUTs. NIMCRUTs can offer this because you’re allowed to defer your tax obligations on the principal. This allows the trust to continue to grow and generate income for you. But what if something unexpected happens and you need your money sooner than expected?
But what if your needs change? What if you want to start taking distributions before the end of the trust’s term?
With a Flip CRUT, you can. The trust will automatically switch to a standard CRUT at the set date, so you can take distributions whenever you need them.
If you are funding your CRUT with illiquid assets, a Flip CRUT may be a good option for you. This is because the trust will not have to sell the assets until the end of the term, allowing you to avoid capital gains taxes and take a large payout before exiting. You get to build your make-up provision with NIMCRUT tax-free income and—once it is flipped to a standard CRUT— get a larger distribution.
If you foresee retirement or needing regular payouts in the future, a Flip CRUT may be the best option for you. But for businesses that are still in their growth phase, a Flip CRUT can provide the flexibility they need to make the most of their tax benefits.
The Benefits of Flip CRUT for Businesses
There are three key benefits of a Flip CRUT for businesses:
- Flexibility: As we mentioned earlier, the main benefit of a Flip CRUT is its flexibility. The trust will automatically switch to a standard CRUT at the set date, so you can take distributions whenever you need them. This can be especially helpful if your needs change or if you want to take distributions before the end of the trust’s term.
- Tax-Efficiency: Flip CRUTs are designed to be tax-efficient. This means you don’t pay any taxes on the money you put into it or on the income it generates. And because the trust pays out its income over a number of years, you can spread out your tax obligations.
- Growth: A Flip CRUT’s NIMCRUT stage allows you to grow your assets tax-free. This can be a huge benefit for businesses that are in their growth phase. And once the trust is flipped to a standard CRUT, you can take a large distribution before exiting.
All three CRUTs have their benefits, so it’s important to consult with an expert to see which one is right for you. But if flexibility is your main concern and you’re funding your CRUT with illiquid assets, a Flip CRUT will likely be the best for you and your business.
If your business is still in its growth phase, a Flip CRUT can provide the flexibility you need to make the most of your tax benefits. With a Flip CRUT, you can get the superior ROI benefits of a NIMCRUT while allowing you to pivot later on to a standard CRUT if you want to prioritize regular payouts instead of larger ROI gains.
Flip CRUTs also offer tax efficiency by avoiding capital gains taxes and allowing you to spread out your tax obligations. So if you’re looking for a CRUT that can provide both flexibility and growth potential, be sure to consult a financial advisor about using a Flip CRUT for your business.