Double Depreciation (Flip) Trusts

A "flip trust" is a new income-for-life trust that combines the features of a unitrust and income trust. It is an especially attractive device for gifting undeveloped real estate or income producing real estate that has been fully depreciated.

The IRS has long recognized three trusts:

  • A Unitrust – where a fixed percentage of the assets (revalued annually) were paid annually to the donor.
  • An Income Trust – when the donor receives the lesser amount of a fixed percentage (annuity trust) or the income only from the assets.
  • An Income Trust with a makeup provision – whereby deficiencies in a given year may be made up from income received in subsequent years.

These plans made it difficult to accommodate undeveloped real property and fully depreciated real estate.

A Gift of Real Property Becomes Doubly Valuable with Regulation 664

Regulation 664 made it possible to put real property into a trust which would function as an income-only trust until the property was sold and then it would revert to a regular unitrust.

The triggering device is generally either through the sale of the property or a specific event such as the donor reaching a specific age or other occurrence (e.g. spouse’s birthday, grandchild’s high school graduation, etc.). The latter triggers are to be “spelled out" in the trust agreement.

Once the property has been sold, the donor will receive the fixed percentage rate of the asset in the following calendar year.

EXAMPLE: Consider the case of a $400,000 income property that has been fully depreciated.

The property is "gifted" to the College via a charitable trust.

  • The donor receives an immediate gift deduction for the full $400,000 fair market value of the property. This deduction may be spread out for up to 6 years – the year of the gift plus 5 years. (This deduction is akin to a second depreciation of the property at the current market value.)

The "trust" which owns the property may function as the landlord – receiving and collecting rents, paying taxes, etc.

  • Excess net income will pass to the donor(s) for his lifetime and is taxed at ordinary income levels. This would mean an annual income to the donor(s) approximating his current situation.
  • The added feature of the "flip-trust" is that the trust may sell the property at which time the income trust reverts to a unitrust.

At the death of the donor(s), the assets of the trust revert to the College.

The donor receives

Any examples given are meant to be illustrations of the benefits of charitable vehicles available to you. This should not be construed as legal or tax accounting advice. Always consult an attorney for specific arrangements. The College can assist you in this regard.

For further information on double depreciation (flip) trusts, fill out the Request for Information Form or contact Bill Heaton, Vice President of Advancement at wheaton@scco.edu or at 714.449.7464.