Establishing a recurring source of income for you or your beneficiaries is a priority for many. With so many options out there, you may wonder which one will ultimately serve you best. Charitable remainder trusts are a great option that allows you to avoid capital gains taxes, pull a steady income, protect your assets, and generously give to a charity you select, and NIM CRUTs are a specific type of CRT that could work for you.
What is a NIM CRUT, and why should you consider this for your estate planning? This detailed guide will walk you through everything you need to know before contacting a legal professional to help you draw up the trust.
What is a NIM CRUT?
A Net Income with Make-Up Charitable Remainder Unitrust (NIM CRUT) is, in many ways, similar to a standard charitable remainder trust. With the assets placed within a trust, your traditional CRT allows for a fixed percentage of the trust’s value each year to be distributed, regardless of how much (or how little) the trust’s assets grew over the previous calendar year.
A NIM CRUT is a little different when it comes time for a payout.
Instead of giving you the set percentage like a CRUT, you receive the trust’s income up to the point of the distribution limit. That means that if the trust did not generate enough income to give you the full distribution, it will give you what it can out of the trust’s net income. If you have a good year, then it will give you the full distribution limit.
However, there is one more small difference that sets a NIM CRUT apart. If you do not receive the full payout, the difference between what you drew and what you should have drawn carries over into future payments in the years ahead. In other words, it will “make up” what it owes you in the future.
How Does a NIM CRUT Work?
With all of that said, how does a NIM CRUT work in practice?
The first step is setting up a charitable remainder unitrust with your attorney, placing assets inside the trust, and naming a beneficiary to receive payouts from the trust (either a loved one or yourself). The assets in your new trust are removed from your estate and can grow tax-free.
Now that you have a basic framework in place, you must decide on the benefits associated with a NIM CRUT. How much money will you want to draw from the trust? This is typically a percentage of the assets the trust contains, which can vary based on how you frame the initial paperwork.
This is where the major difference in a NIM CRUT comes into the picture. If the trust is doing well, you may receive your full distribution amount. If not, you will receive the largest amount that the trust can pay you based on realized annual gains. It always pays you whichever is lower and may make up for that deficit in more successful future years.
At the end of the term, which could be 50 years or more, the remainder is donated to a charity or charities of your choice, or even your own Donor Advised Fund.
What are the Benefits of a NIM CRUT?
Why would you choose a NIM CRUT over a more standard charitable remainder trust? There are lots of reasons why this might be the right move for your estate planning, and it often centers on the ability to control the distributions you pull each year.
For example, you might have put in several assets that do not generate dividends. The only way to realize the gains from these assets would be to sell them, which could eat into future profits as they appreciate. While in the trust, the assets grow in value tax-free.
On the other hand, your run-of-the-mill CRT would sell them to make the minimum annual distribution. Instead, you can hold onto them until you are ready and make up that income with a larger annual distribution in the year that you sell them to accommodate the years that paid a lower distribution.
In other words, you are simply deferring the income you could make right now until a later date. At that later date, you may be able to take a lump sum payment because the trust will finally have enough funds to cover your payout.
A NIM CRUT can also be better for real estate, since selling real estate rarely takes place immediately. Since the NIM CRUT doesn’t require you to take trust distributions until there is income for the trust, you have some time for the real estate sale to go through.
NIM CRUT Example Scenario
Let’s suppose that you invested in an up-and-coming company on the stock market and bought about $75,000 in shares. Since the time you initially invested, those stocks are now worth a cool $2.5 million. Selling them is no longer an option because federal and state taxes will gobble up a significant portion of your earnings in capital gains taxes.
Instead, you decide to place your assets into a NIM CRUT. You will automatically deduct $250,000 for a charitable deduction (10 percent of the value of the trust). This could be higher based on the age of your beneficiaries, but it cannot be lower.
From here, you can continue to draw funds from the NIM CRUT as long as it continues to generate income. The trust can sell the shares, help you with a major tax break, and contribute to charity (and your family) in a much more generous way than you otherwise would. Over the next several decades, you could pull millions in income from your NIM CRUT.
Establish Your NIM CRUT with Magellan
Does all of this sound like a good option for your estate planning? Magellan can help you with all of the associated estate, tax, legal, and financial planning that goes into setting up your new charitable remainder unitrust. We have the expertise to guide you toward the right trust for you in the here and now and for your beneficiaries down the line.
Contact us today to learn more about whether a NIM CRUT is the right move for you!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.