❗ 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.
As you likely know by now, charitable remainder trusts (CRUTs) are a form of 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.
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.
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 key benefit of the NIMCRUT — and the reason most of our customers choose to use this structure — is the chance to control your annual distributions, grow your money tax-free for longer, and, as a result, realize greater gains over the long term. How do you gain that control, and how do you put it into practice?
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.)
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.)
Here'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:
Scenario 1: Standard CRUT
Scenario 2: NIMCRUT
As you can see from the two scenarios' respective bottom lines, the NIMCRUT deferral strategy can pay off in a big way. On an initial investment of $500k, and assuming an average growth rate, you could end up with more cash in your pocket and $15k more in the trust after only three years. The gains from this strategy will only be larger the longer you leave your money to grow.
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 a 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.
You can choose from different types of Charitable Remainder Trust, including Standard, NIMCRUT, and Flip CRUT.