A NIMCRUT allows you to defer withdrawals and put off taxes for longer. It can lead to greater returns with the benefits of additional tax-free compounding.
❗ Key Takeaway: Deferring payouts with a NIMCRUT allows you to put off taxes for longer and leads to greater returns, by capturing the benefits of additional compounding.
Last time, we kicked off our Fundamentals of Charitable Trusts series, where we'll break down each of the main types of charitable remainder unitrust, with our take on the standard CRUT— the plain vanilla version of the CRUT strategy. Today, we'll highlight a slightly more advanced tool: the net income with make-up charitable remainder unitrust, or NIMCRUT.
Let's Recap: What is a Charitable Remainder Unitrust?As you likely know by now, charitable remainder trusts (CRUTs) are a form of a tax-deferred account, much like an IRA, that are designed to incentivize charitable giving in exchange for significant tax benefits: tax deferral and the ability to lower your tax rate via income smoothing.
We offer three basic forms of Charitable Remainder Unitrust: the standard CRUT, the NIMCRUT, and the Flip CRUT. These formats carry similar benefits — they are all tax-exempt, you get a charitable deduction when you put assets into each, and you'll leave the remainder for a charity at the end. The primary difference — and the focus of this post — is in how and when you receive distributions from the trust.
What is a Net Income with Make-up Charitable Remainder Unitrust (NIMCRUT)?A NIMCRUT is in many ways very similar to a standard CRUT, with one notable exception. With a standard CRUT, you receive a set percentage of the trust's value as a payout every year, regardless if the trust's assets grow or shrink in value, or whether the trust has any income. With a NIMCRUT, although you are still entitled to that amount every year, you will only receive the trust's income from the year, up to that distribution limit. (That is, a NIMCRUT pays you the lower of the trust's income or the standard payout.)
Practically, this means that if the trust doesn't have enough income to pay out the fixed percentage of the trust's assets that it owes you, you'll only receive whatever income the trust does have. And if there's a shortfall — if the trust doesn't have enough income to pay the whole amount it owes you, the rest carries over to future years. (That's the "make-up" part of the NIMCRUT, and it's kind of like an account receivable that you can draw on in the future.)
Why is this distinction important? Because you can take advantage of that make-up math to allow your money to grow tax-free for longer. Let us explain.
How does a NIMCRUT work?These steps likely look familiar. That's because they're almost exactly the same as the standard CRUT, except for the additional flexibility on the annual withdrawal. We'll cover the major differences, but refer to our standard CRUT post for a refresh on what they have in common.
- The beginning: just like a standard CRUT. Like with any CRUT, you will likely choose an asset that is highly appreciated or is likely to appreciate significantly. Next, you'll designate a beneficiary — the person who will receive the annual income from the trust; this is usually you or a family member. After that, you'll transfer your assets into the trust and claim your deduction, which is typically equal to about 10% of the starting value of the assets. And then — voila — you get to sell your asset and, in most cases, the trust pays no taxes on that sale, allowing you to grow more money for longer.
- Determine how much you want to withdraw. This is where the NIMCRUT and standard CRUT differ, and where the strategy starts to come in: With a NIMCRUT, because the trust only distributes income you can control your withdrawal amount (to the extent you can control realizing income).
- Take your annual withdrawal. So you've decided you'd like a distribution. What now? The trust has to realize income by selling an asset; otherwise, it won't have the income to meet your withdrawal needs.
- Leave the remainder to charity. The remainder —whatever is left in the trust at the end of the trust's term — is donated to a charitable organization. Recall that this is the reason your money gets to grow tax-free in the first place: You get the tax exemption, and in exchange, you promise to leave the remainder to another tax-exempt entity — a charity.
Because a NIMCRUT can only make distributions when you realize income, the simplest way to control your distributions is to minimize the trust's income in years when you don't want a payout. You can do this in several ways, but the most common is to (1) invest in a diverse set of assets that don't typically pay out dividends, and (2) choose to sell those assets, and realize income, only once you're ready to cash money out of the trust.
But, you're probably thinking, why would I opt to receive less money from my trust in a given year? Is that money gone forever? Nope! This is where the NIMCRUT's "make-up provision" comes into play. No matter what kind of CRUT you choose, you'll be owed a distribution each year. With a NIMCRUT, if you do not receive a given amount of distributions in a year, you can make up those distributions in future years, when the trust has enough income to cover the payouts (because you chose to realize the income when you are ready to take it.)
Why is the NIMCRUT distribution strategy helpful?So you can defer your payouts in a NIMCRUT. Why would you want to? Because the longer you defer your withdrawals, the longer your money stays in the trust, and the longer it can grow tax-free. (In general, the longer your assets can grow tax-free the larger the returns.)
Let's walk through an exampleHere's a simple example: Suppose that you have $500k in start-up equity, crypto, public securities, or another asset. You've decided to use a 20-year term NIMCRUT. What are the benefits, and how does this compare to a standard CRUT?
- Charitable aspects. First things first, similar to a standard CRUT: You would receive an immediate charitable tax deduction equal to 10% of the assets' current value. In this example, that would allow you to reduce your taxable income by $50k this year. Then, at the end of the term, the remainder left in the trust will go to the charity you designated.
- Payout Rate. In a 20-year term CRUT, given the IRS's payout formula and the prevailing statutory interest rate, your payout rate would be approximately 10% per year — exactly the same as a standard CRUT. (It's actually 11% right now, but we'll use 10% for convenience's sake). Remember, though, that because we're working with a NIMCRUT here, the trust will pay out the lower of the payout rate or the trust's net income.
- Payouts. To help draw out these differences, let's compare the Standard CRUT and the NIMCRUT:
- Year 1 - Assume that by the end of the first year, your assets have grown by 10% (around the historical average for a diversified portfolio), from $500k to $550k. It doesn't matter how much money you want to withdraw. With a standard CRUT, you're going to receive around 10% of the trust's assets, or $55k. As a result, that money is in your pocket, and the trust's value is $495k.
- Year 2 - The assets have grown another 10%, from $495k to $545k. Once again, you are required to withdraw your 10%, which comes out to about $55k. That leaves your trust with $490k.
- Year 3 - The assets grow 10% once again, this time from $490k to $539k. You take your mandatory payout of $54k. At the end of three years, then, you've received $163k, and your trust still has $485k.
- Year 1 - Same assumptions here: By the end of the first year, your assets have grown by 10%, from $500k to $550k. But this time, you have some control over whether to withdraw money from the trust, and you decide that you'd rather leave the money alone and let it grow, so you work with us to avoid selling any assets. You're still owed 10% of the trust's assets, or $55k. But because the trust has no income this year, you receive $0, your trust still has $550k, and you have $55k in your make-up account.
- Year 2 - The assets have grown again, from $550k to $605k. You decide to defer again because you have no need for liquidity and prefer to let your assets compound tax-free for another year. You're still entitled to 10% of the trust's assets, or about $60k. Your make-up account is now worth $115k, and your trust still holds the entire $605k.
- Year 3 - One more year of 10% growth, this time to $665k, and you're again entitled to a 10% payout, or $66.5k. Now, however, your circumstances have changed: Maybe you want to put a down payment on a house or pay for your kid's first year of college. Whatever the reason, you decide that you want to withdraw as much as possible. With a NIMCRUT, you can withdraw the lower of this year's 10% payout plus the amount in your make-up provisions, $182k, or the trust's unrealized capital gains, which in this example is $165k. You sell shares sufficient to create $165k of liquidity, and you receive that amount at the end of the year. After the first three years of the trust's term, all in, you've received that $165k, and your trust still holds $500k.
What does all of this mean?Tax deferral. Each of these trusts is designed to defer taxes and, ultimately, to leave you with more money to invest for long-term growth. This tax deferral (and the charitable giving) are why Charles Schwab's Charitable Strategies Group calls CRUTs "particularly suited for highly appreciated assets."
Control payouts and further defer taxes. The main practical insight is that with a NIMCRUT, there's an increased amount of flexibility when determining whether the trust pays you out. By controlling when you realize income, you can effectively delay payouts for as long as you'd like, assuming the assets don't have a forced liquidity event.
Returns. That flexibility allows NIMCRUT's assets to compound longer in a tax-free environment. As a result, you might see as much as 30-40% greater payouts than you would with a standard CRUT.
In short, although everyone's preferences and circumstances are different, this structure can be a good fit for customers who are willing to give up predictable, consistent payouts in search of greater returns.