NIMCRUTs – Taking Care of Yourself, Your Family, and the World

Many high-net-worth individuals have multiple goals: taking care of themselves and their family, reducing taxes, and making a positive impact on the world. Any two of these goals can be achieved somewhat easily, but it takes creative planning to achieve all three at the same time. The U.S. tax code allows the charitably inclined to receive tax benefits in return for their philanthropic efforts. The IRS essentially says, “if you give to a good cause, we’ll give you a break.” A Net Income Makeup Charitable Remainder Unitrust, or NIMCRUT, is a type of charitable trust. It can provide income tax benefits from charitable giving and streams of income to non-charitable beneficiary(ies) while leaving the remainder to charitable beneficiary(ies) of your choosing.

How Charitable Remainder Trusts Work

Charitable remainder trusts (CRTs) are governed by Section 664 of the U.S. Code. CRTs are termed “split-interest” trusts by the IRS – a trust with a charitable and non-charitable class of beneficiary. The grantor (the person who gifts to the trust) is allowed to take a charitable deduction on their personal tax return for gifts to the trust, and the trust is tax-exempt to the extent that the charitable beneficiary has an interest in the assets of the trust.

Essentially, assets are put into a trust for a term of years. A charitable beneficiary (the “remainder beneficiary”) gets whatever assets are left in the trust at the end of the term of years. A non-charitable beneficiary (the “income beneficiary”) is entitled to a taxable income stream from the trust. Thus, everyone benefits: the grantor gets a tax break, the income beneficiaries get to receive income for a term of years, and the charity gets a gift at the end of the term. Additionally, when properly structured, the assets in the trust are removed from the grantor’s taxable estate.

If this all sounds too good to be true, you should know that there is a catch. The IRS stipulates that the remainder donated to charity must have a value of at least 10% of the value of the assets initially gifted to the trust, determined at the time the property is transferred to the trust. This is to protect the charitable beneficiary and prevent the donor from taking a charitable deduction and then shifting all the assets to the income beneficiary through clever restructuring.

The NIMCRUT

A NIMCRUT is a type of charitable remainder trust. The NIMCRUT is unique in how payments to the income beneficiary are structured. There are two pieces to this: During the trust term, the income beneficiary receives the net income generated by the assets in the trust. The second piece is the “unitrust amount.” This is a predetermined percentage of the value of the trust assets (between 5% and 50%), calculated annually and owed to the income beneficiary.

So, does the income beneficiary get a percentage of the assets, or the income generated by the assets? The answer is both. This is where the “makeup” part of the NIMCRUT comes in, and what makes it a unique and flexible planning tool. The unitrust amount acts as both a cap and a record of what the income beneficiary is owed. During years in which the net income of the trust is less than the unitrust amount, the NIMCRUT distributes the net income and accrues the remaining unused unitrust amount. This can continue accruing for the entire term of the trust. During years in which the net income is greater than the unitrust amount, the excess income over the unitrust amount can be “made up” by distributing the excess income up to the total accrued unitrust deficiencies from prior years.

When a NIMCRUT Makes Sense

  1. You are charitably inclined

This is the most important prerequisite. Remember that at the end of the trust term, all assets remaining in the trust will be distributed to the charitable beneficiary. Before setting up a trust like this, be sure that that’s where you want your assets to go. If not, you may want to re-think your plan. While substantial, the tax benefits from this type of planning do not outweigh the cost of losing a large chunk of your assets to charity if that is not your true intent. However, if one of your top priorities is philanthropy, a NIMCRUT provides considerable flexibility. Charitable beneficiaries you can choose from include charities, family foundations, and donor advised funds (DAFs).

  1. You want to provide an income stream for yourself and/or others for a term of years or life

The IRS allows a NIMCRUT to last for either a maximum of twenty years or the life of the income beneficiary. The trust accounting income generated by the assets in the trust are distributable to the income beneficiaries up to the annual unitrust amount, plus any accrued deficiency that was built up in prior years.

The difference between trust accounting income and taxable income is a topic for another day, but the big picture is this: Trust accounting income is governed by the Uniform Principal and Income Act (UPIA). The UPIA designates certain items as “income” and other items as “principal.” For example, dividends and interest are considered income, and capital gains are considered principal. If there is income generated inside the trust, it must be paid out to the income beneficiaries. If income exceeds the unitrust amount plus any accrued unitrust deficiency, the excess income is added to the principal of the trust.

Distributions made by the NIMCRUT to the income beneficiary are taxable to the beneficiary in the year of distribution and fall into one or more of the following four tiers of taxable income in order of worst to best: ordinary income (worst), short-term capital gains, long-term capital gains, and tax-free return of principal (best). 

  1. You want to give to charity – but not yet

When you gift assets to a charitable remainder trust, you get a tax deduction for the present value of the gift in the year of contribution. This means you get to take the deduction now and still benefit from the assets in trust for the next twenty years (or the term you choose), and then give the remaining assets to charity at the end of the term.

  1. You want to defer tax on the sale of a highly appreciated asset

One of the most attractive features of the NIMCRUT is the ability to defer taxable income. Because 1) the trust itself is tax-exempt, 2) distributions to income beneficiaries are only taxed when distributed and 3) the unitrust distributions accrue year-over-year if there is not enough income to satisfy the unitrust payments, there are many planning opportunities to defer tax on income generated inside the trust. Since capital gains are typically treated by the UPIA as trust corpus (principal) and not income, capital gains generated inside the trust would not have to be distributed to the income beneficiary right away. The proceeds could be reinvested to generate income that could then be distributed to the income beneficiary.

The existence of income in the trust could further be controlled if trust assets are contributed to an LLC owned by the trust. In this case, the trust would have no accounting income until the manager of the LLC decided to make a distribution to the NIMCRUT, which would allow more tax deferral and flexibility.

  1. You have a taxable estate

Contributions to NIMCRUTs are irrevocable. It may sound scary to lose control, but if you are married and have over $27.22 million of assets, or single and have over $13.61 million of assets, your estate will be subject to up to a 40% estate tax on any assets over the threshold. Gifting to a NIMCRUT removes those assets from your taxable estate. If you have assets which may grow substantially, it may be worthwhile to transfer those assets into an irrevocable trust now so they can continue to grow without having to worry about a hefty tax at your death. Also worth noting is that the current federal estate tax exemption is set to sunset at the end of 2025. At that point, the exemptions will drop to about half of what they are now. This is a “use it or lose it” situation.

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