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Using a NIMCRUT to benefit charity and maximize after-tax returns in a liquidity event

A Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT) is an effective means to maximize after-tax returns as well as benefit charities in certain circumstances common to high net-worth families and individuals.  Here is an illustration of how this specific tax planning might be valuable.

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IDEAL CIRCUMSTANCES

A donor who is anticipating a significant capital gains event (e.g., business liquidity event, or the sale of concentrated stock, cryptocurrency, or real estate) could find this trust technique helps them accomplish many goals.  A donor who wants to defer the tax, diversify investments in a tax-free manner, and receive a stream of payments in future years (including retirement years that could involve a lower tax bracket) finds themselves in the ideal circumstances to use a NIMCRUT.

THE BASIC IDEA

Donor funds the NIMCRUT with an appreciated asset. The NIMCRUT can sell the asset tax-free, the transferor is not taxed currently on the sale, and the NIMCRUT can also reinvest the proceeds and get tax-free growth on the reinvested proceeds. The nature of a NIMCRUT (including those with a “FlipCRUT” feature which flips or converts by removing the net income limitation upon the happening of a triggering event such as the sale of an asset or a certain date) allows flexible payments and deferral of payments depending on the specific structure used. The charitable beneficiary would receive the remaining assets upon the death of the donor (or, if applicable, death of the surviving spouse). The charitable beneficiary can be limited to “public charities” (including a charity administering donor advised funds (DAFs)), so that the amount of the charitable gift can be based on the fair market value of the contributed property, rather than limited to the tax basis in the property.   

Benefits of a NIMCRUT

  • Current charitable income tax deduction equal to at least 10% of the value contributed
  • No current tax on the sale of assets by the NIMCRUT, nor for ongoing investment income (except to the extent distributed)
  • Flexible payments of income from the trust over the donor’s lifetime (and spouse’s lifetime)
  • NIMCRUT assets are not subject to estate tax at death
  • Remaining assets benefit the donor’s chosen charity upon death

Ideal Assets

  • C corporation stock
  • Real estate without debt (or in some circumstances, with debt that has been in place for at least five years)
  • Cryptocurrency held for investment
  • Certain assets associated with a pass-through business

ILLUSTRATION

Assumptions

  • The Donor and donor’s spouse are both 50 years of age. Use the current 2% IRS rate for valuing the trust interests.
  • The NIMCRUT is funded with C corporation stock valued at $10 million with $1 million of tax basis, which is subsequently sold for $10 million shortly after funding (but no binding agreement to sell the asset was in place at the time of funding).
  • The Donor’s deduction for the charitable remainder in the NIMCRUT is 10% of the initial value, or $1 million, which is used to offset ordinary income taxed at a 37% rate in the year of funding. The charitable remainder beneficiary must be a “public charity” under the terms of the trust (although the donor can retain discretion to at any time choose or alter the specific charitable beneficiaries).
  • The NIMCRUT reinvests the sale proceeds into a limited partnership (LP), with an unrelated third-party as general partner, which in turn invests solely in equities (or equity funds) that generate only long-term capital gains and qualified dividends.
  • The NIMCRUT investments generate a 6% total return annually, including a 2% dividend yield.
  • The LP investment strategy involves reinvesting, rather than distributing, all investment proceeds for the first 15 years. After 15 years, the LP begins distributing $1.5 million per year to the NIMCRUT, with 2% annual increases in the distributions going forward. 
  • The Donor’s long-term capital gains tax rate is a constant 23.8% throughout the term.
  • The LP distributions would become the NIMCRUT’s “income” in determining the distributions to the donor and/or donor’s spouse, therefore, based on the foregoing assumptions the NIMCRUT could distribute $1.5 million per year beginning in year 15 (age 65), with 2% annual increases in the distribution. These increasing payments could be made in full for years 15 through 37 (ages 65-88), after which payments would decrease. All distributions would be taxed at long-term capital gains rates.
  • The Survivor of donor and donor’s spouse lives to age 92. 

NIMCRUT NUMBERS

Initial contribution:  ($10,000,000)

Tax benefit of initial income tax deduction:  $370,000

Present value of expected payments, net of tax:*  $20,485,616.83

Total benefit to donor:*  $20,855,616.83

Benefit to charity:*  $2,948,715

COMPARISON

If alternatively no NIMCRUT is implemented, and the asset is sold in year one, with after-tax proceeds reinvested in the same manner in a taxable account, with funds withdrawn on the same schedule, the fund is exhausted by age 80, with no assets remaining to give to charity. 

*all future values are discounted using the 2% IRS discount rate for March 2022.

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John Bunge
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