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Estate Planning Idea: Net Income Make-Up Trust (NIMCRUT)

Greg A. Raffaele CPA CVA FCPA

Congress created Charitable Remainder Trusts (CRTs) as legal entities allowing a taxpayer to save taxes in exchange for transferring assets to a charity or foundation. The Charitable Remainder Unitrust (CRUT) is one of the two main types of CRTs. The Net Income Make-Up Unitrust (NIMCRUT or 'trust') is a common type of CRUT. The taxpayer1, who is also called the donor or grantor, may select or act as the trustee. The trustee manages and invests the assets and pays income equal to a fixed percentage of the asset's annual fair market value to the donor and his beneficiaries for life or during the term of the trust. The trustee decides when the increase in trust income must be paid to income beneficiaries, which is usually in the year it is earned. The donor determines the trust distribution rate, a fixed percentage that must be at least five percent, before creating the trust. The donor can make additional asset transfers at any time in any amount.

The income resulting from the fixed percentage is called the 'unitrust' amount. The lower of the actual trust income or 'unitrust' amount is paid annually to ensure that the trust principal or 'remainder interest' always remains intact. The unpaid 'unitrust' amount from earlier years can be 'made-up' or paid in future years if the actual trust income is more than the fixed percentage. When the trust ends, generally after the income beneficiary dies, the remainder interest passes to the charity or foundation chosen by the donor.

NIMCRUTs have become a preferred financial alternative for many professionals and business owners because of its numerous benefits and advantages. A taxpayer is an ideal candidate for a NIMCRUT if he wants:

• Tax Deductions: The charitable tax deduction for assets inside the trust is equal the asset's fair market value less the present value of the anticipated future income payments made by the trust. Only part of the asset's value is deductible since the tax deduction is greater if the donor is older and the trust distribution rate is lower. A NIMCRUT also provides capital gains and estate and gift tax savings.


• Endowment: A NIMCRUT offers a prudent way to make a gift to the charity or foundation of the donor's choice. The donor can select the charity when the trust is created and change it anytime thereafter.


• Unlimited Transfers: The donor can make unlimited asset transfers of any amount anytime after the initial transfer. These transfers give the donor controllable tax management potentially avoiding significant estate taxes of his assets at death. Assets such as stocks, bonds, mutual funds, insurance, real estate, art and collectibles can be transferred into the trust.


• Flexible Income: With proper investment selection in the trust, the donor can enjoy either a steady or fluctuating income stream allowing him to enjoy tomorrow's wealth today. Income beneficiaries receive income for life or a specific term. The income, which varies with the fair market value of the assets in the trust, is limited to the trust income in any one year. Unpaid unitrust income in early years is made up in later years if the trust income exceeds the unitrust amount. The donor can name one or more income beneficiaries for the life of the trust.


• Tax-Free Compounding: Investment gains and earnings grow tax-free allowing them to compound much faster over time.


• Safety of Principal: The principal inside the trust is safe because the unitrust distributes only trust income and the principal remains intact until distributed to the donor's named charities and foundations.


• No ERISA Compliance: The donor can access retirement savings without complying with tax rules or paying tax penalties. NIMCRUTs have no minimum distribution rules beginning at age 70-1/2 and no tax penalties for withdrawals made prior to age 59-1/2, which make them an alternative to qualified retirement plans. The donor can save more money on a tax-favored basis after maximizing his qualified retirement plan.


• Creditor Protection: Assets in a properly written trust are protected to the extent the law allows from future creditor claims.


• Privacy and Confidentiality: The trust is private and confidential.


• Low Maintenance Costs: Tax-favored vehicles without major administrative responsibilities and costs. Administration costs are generally lower than for other plans.

The additional income or tax savings enjoyed by the donor can buy life insurance owned by a life insurance trust, which is an irrevocable trust primarily intended to own life insurance and generally used to keep insurance proceeds out of the taxable estate of the insured. The death benefits from the insurance, therefore, pass tax-free to the donor's beneficiaries replacing the value of the assets transferred to the trust.

The donor should not be deceived by the simplicity of the basic trust document since the complexity is in the design. The donor should instead use a financial advisor and professional trustee, both with substantial expertise in charitable trusts, to design and execute his trust to achieve his financial and charitable goals. The donor should also keep accurate records to avoid trouble with the IRS.

Other than in NIMCRUTSs or other tax-favored maneuvers, valuations by a CVA (or other valuation analyst) are important in financial, tax and litigation matters.

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