June 3, 1999 | Read Time: 2 minutes
The Internal Revenue Service is giving donors more time to take advantage of rules issued in December that make certain types of planned gifts more lucrative for contributors and charities.
The regulations clarified how the I.R.S. treats “flip” trusts, in which a donor converts one type of charitable remainder trust into another. And, under the regulations, many donors who could not do so before have been able to convert existing trusts to flip trusts to gain certain financial advantages (The Chronicle, January 14).
The rules said that donors had to begin legal proceedings by June 8, 1999, to make the change. But the tax agency now says, in Notice 99-31, that it will amend the rules to give contributors an extra year — until June 30, 2000 — to file court papers. The I.R.S. clarified that donors who can convert trusts under state laws without going to court can take advantage of the rules as long as they complete their “reformations” by June 30, 2000.
Through a charitable remainder trust, a donor gives cash, stock, real estate, or other assets to a charity, which invests the gift. In exchange, the charity provides regular payments to the donor, a beneficiary, or both. When the donor and any beneficiaries die, all the assets in the trust go to the charity.
Flip trusts are attractive to donors who want to use real estate or other non-liquid assets to set up a charitable trust because they allow the donor to bypass payout requirements normally associated with the trust until the donated property can be liquidated.
A flip trust initially bases payments to donors on the amount of income generated by the trust. Therefore, if there is no income until a non-liquid asset like land or closely held stock can be sold, no payment to the donor is required. Once the assets have been sold, the trust is “flipped” to provide a different type of payout. Donors can then receive payments based on a fixed percentage of what the trust’s assets are worth each year — not on the income generated by those assets. Many donors prefer the percentage payments, partly because they are thought to be a better hedge against inflation and stock-market volatility.
The rules issued in December were welcomed by charities and financial experts because they allowed donors who had avoided flip trusts to amend their trusts to take advantage of percentage-based payouts and other financial benefits associated with flip trusts. Many donors with non-liquid assets shied away from such trusts because, until last year, the government had indicated that flip trusts violated the tax code.
The I.R.S. said that it decided to extend the deadline because many lawyers had requested additional time and because some state laws made it difficult for people to meet the original date. The notice is available on the agency’s Web site at http://www.irs.ustreas.gov/prod/bus_info/tax_pro/adv-notice.html.
