NIMCRUTs, or Net Income with Makeup Charitable Remainder Unitrusts, are advanced charitable giving strategies designed specifically for high-net-worth individuals. These trusts allow donors to make significant charitable contributions while also providing a stream of income for themselves or their beneficiaries. NIMCRUTs offer a number of benefits, including tax advantages, potential for increased income, and the ability to support favorite causes while also meeting financial goals.
In this blog, we will explain what NIMCRUTs are, how they have evolved over time, and how high-net-worth individuals (HNWIs) can use them as part of their financial planning.
What are NIMCRUTs?
A Net Income Makeup Charitable Remainder Unitrust (NIMCRUT) is a charitable trust that allows an individual(s) to make a donation while receiving an income from the trust for a specified number of years or for the lifetime of the individual(s).
The income received by the individual(s) is based on the net income generated by the trust, usually from investments in a diverse portfolio of assets. At the end of the trust term, the remaining assets are distributed to the charities determined by the donor. We’ll get more into the benefits of NIMCRUTs in a second, but let's first look at how Charitable Trusts came to be.
A Historical Legislative Landscape for Charitable Giving
Knowing how Charitable Trusts have been shaped by legislation over the years will give you a better understanding of NIMCRUTs and how to receive the best tax benefits.
Tax Reform Act of 1969: The first national policy on charitable planned giving is created.
Revenue Rule 77374 (1977): The probability test for charitable remainder annuity trusts is established. There now has to be less than a 5% probability that you’re going to exhaust the initial capital contribution.
Tax Relief Act of 1997: A maximum payout rate of 50% is established, as well as a 10% minimum remainder requirement.
Tax Relief Healthcare Act of 2006: A Charitable Remainder Trust (CRT) will no longer lose its tax-exempt status for having an unrelated business taxable income (UBTI) in the trust. However, there is now a 100% excise tax on the UBTI in the trust.
Knowing the rules that have been established over the years for Charitable Trusts will allow you to get the most out of their benefits while also being aware of potential pitfalls.
How High-Net-Worth-Individuals Can Utilize NIMCRUTs To Save Money
One of the most valuable features of a Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT) is its ability to facilitate tax-free growth of funds over a set period or lifetime. This characteristic sets NIMCRUTs apart from simple Charitable Remainder Unitrusts (CRUTs), and may make them particularly attractive to certain individuals due to the added benefit of a "makeup" feature.
What is the NIM-CRUT Makeup Feature?
With a NIMCRUT, if the trust produces more income than it’s supposed to pay out, the excess money will go back into the trust’s principal. Likewise, if the trust produces less income than it’s supposed to pay out, the beneficiaries may receive less money that year but will have it “made up” to them from an excess year. This feature can lead to the same amount of income over time but without ever attacking the principal. With a CRUT, no matter what kind of year the trust has financially, you’re getting the same amount which can lead to the trust’s principal decreasing gradually.
Donating assets to a Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT) can be a beneficial way to reduce taxable income and avoid capital gains tax. By contributing assets to the trust, an individual is able to diversify their holdings while also mitigating the risk associated with certain types of assets, such as stocks or real estate. This approach to charitable giving allows individuals to make significant donations while also receiving favorable tax treatment and potentially enhancing their financial situation. It is important to note that the specific tax implications of donating to a NIMCRUT will vary based on individual circumstances and the laws governing charitable giving in the donor's jurisdiction.
It’s important to consult with trusted and professional financial planners when setting up a NIMCRUT as there are potential benefits and drawbacks that should be evaluated with expertise before making a decision.
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