It’s been a good decade for people. Stocks have gone up. Real estate has gone up. You might have even benefited from a liquidity event where you owned stock in a private company that has now gone public. What’s interesting is that most people left to their own device make a big mistake of letting the tax tail wag the dog. If you have an appreciated piece of real estate or stock, you’ll be inclined not to sell it because you are worried about paying a massive capital gain tax. What if I was to tell you that there is a way to really apply the age-old adage that it is more blessed to give than to receive.
Enter the greatest tax strategy you never heard of before….The NIMCRUT.
What does NIMCRUT actually stand for….
NI = Net Income:Only trust income is paid by the unitrust.* You control the level of income distributed.
M = Makeup provision: Amounts not paid due to lack of trust income can be made up in the future with income excesses.**
CRUT = Charitable Remainder Unitrust: Additional contributions can be made at any time in any amount.
* A minimum of 5% is paid annually.** To the extent trust income exceeds its fixed percentage.
What Is NIMCRUT?
NIMCRUT is short for Net Income with Makeup Charitable Remainder Unitrust, a trust specifically defined by federal tax law that allows you to provide income to yourself or others for life, or a term of years, and to receive a tax deduction. This works especially effective for those families that a) have appreciated assets and b) do not mind giving up control of the lump sum of money.
How A NIMCRUT Works
As the owner of a NIMCRUT (sometimes also referred to as the “donor,” “grantor,” “settlor” or “trustor” in trust documents), you irrevocably transfer assets to your trust, which is managed by a trustee of your choice. During the term of the trust, the trustee invests the assets and pays a fixed percentage of the value, as revalued annually, to you and/or others, such as a spouse or children. Should the trust earn less income than the pre-determined fixed percentage (a minimum of 5% is required), it will only distribute what is earned.
This feature ensures that the trust principal remains intact at all times.
If, in a later year, the trust earns more than the fixed percentage, it will make up its earlier shortfall to the extent its earned income exceeds its fixed percentage. When the trust ends, principal passes to charity for the purpose you designate.
Are You A Candidate for A NIMCRUT?
NIMCRUTs appeal to a wide range of individuals and business owners. You may find one especially advantageous if:
- You have invested the maximum in your qualified retirement plan for this year and want to put more money away in another tax-advantaged vehicle.
- You want a tax-favored vehicle that offers liquidity.
- You want to take advantage of tax-deferred compounding of investment gains.
- You want to avoid the potentially confiscatory taxation of qualified plan assets at death.
- You want a tax-advantaged vehicle that does not involve time-consuming administrative responsibilities.
- You are not completely satisfied with the restrictions and requirements of your qualified retirement plan.
NIMCRUTs Offer Many Benefits
With a NIMCRUT, you’ll enjoy a wealth of valuable benefits.
There’s no limit on contributions nor a requirement to make contributions. Contributions can be made at any time, allowing precise tax management. The trust is private and confidential, and assets in the trust are generally protected from creditors. You may designate one or more income beneficiaries for the life of the trust. Administration costs are generally lower than for other plans.
A NIMCRUT enables you to enjoy tomorrow’s wealth, today.
NIMCRUTs have no minimum distribution rules beginning at 70-1/2, and no tax penalties for withdrawals made prior to age 59-1/2. Contributions create valuable tax deductions, for a portion of their value. Earnings grow free from taxation, enabling them to compound much faster over time. A NIMCRUT offers a prudent way to make a gift to the charity of your choice. (You can select the charity when you set up the trust and change it anytime thereafter.)
A Wealth of Benefits
- Tax deductible contributions
- No limit on contributions
- No required contributions
- Tax-free buildup of assets
- Low maintenance costs
- Steady or fluctuating income stream, as desired
- No requirement to take income
- Creditor protection
- One or more income beneficiaries
A NIMCRUT Case Study
John and Jane Smith, both in their fifties, plan to retire in about a decade. They have placed $1,000,000 in a NIMCRUT. They expect it will generate approximately $60,000 annually in their leisure years. At retirement, the Smiths’ would also like to make sure they have enough liquid capital to purchase a condominium in a retirement community. The trust is to provide the couple the lesser of 6% or the trust’s income each year.
To meet their goals, the trustee purchases investments increasing in value about 6% annually, but generating no trust income. In twelve years, the value of the trust will be $2,000,000, assuming there have been no distributions. (A return of approximately 6% doubles money in twelve years.) The Smiths’ makeup provision is worth close to a million dollars. At this point, the trustee begins making payments to the couple by altering investments to create trust income and can determine the ‘excess makeup’ for years they did not take the income out.
This doesn’t mention the fact that the Smith’s get a massive Charitable Contribution deduction when the money goes into the trust and they can set up an irrevocable life insurance trust (ILIT) for $1,000,000 for their heirs if they want to really have the $1,000,000 pass down to their children. Then, when the Smiths’ pass away they will have the 1mm go to their kids, 1mm stays with the charity (in this case a family foundation they set up), they get lifetime income, and a massive upfront tax deduction.
Sounds too good to be true? The moral of the story is that it is more blessed to give than to receive. Is this a strategy that can improve your financial picture? Go to www.oxygenfinancial.net to get started today.
Ted Jenkin, CFP®, AAMS®, AWMA®, CRPC®, CMFC®, CRPS®
CEO and Founder oXYGen Financial, Inc.
Ted Jenkin is a frequent guest columnist for the Wall Street Journal and Headline News Weekend Express. He is the co-CEO of oXYGen Financial. You can follow him on LinkedIn @ www.linkedin.com/in/theceoadvisor or on Twitter @tedjenkin.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. oXYGen Financial is not affiliated with Kestra IS or Kestra AS. Kestra IS and Kestra AS do not provide tax or legal advice.
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.