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the asset is sold in year one, with after-tax proceeds reinvested in the same manner in a taxable account, with funds withdrawn on the same schedule, the fund is exhausted by age 80, with no assets remaining to give to charity.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