What Is a NIMCRUT and How Does It Work?

A Net Income with Make-up Charitable Remainder Unitrust (NIMCRUT) is a planned giving vehicle that provides income to non-charitable beneficiaries for a set period, with remaining assets eventually going to a designated charity. It combines philanthropic goals with financial planning, offering tax advantages and flexible income distributions. Its purpose is to allow individuals to contribute assets to charity while retaining an income stream.

Understanding Charitable Remainder Unitrusts

A Charitable Remainder Unitrust (CRUT) is an irrevocable trust foundational to understanding a NIMCRUT. Donors transfer assets into a CRUT, which provides a variable income stream to non-charitable beneficiaries for a specified term. This term can be for the life of the beneficiaries or for a period of up to 20 years.

Key parties in a CRUT include the donor, who establishes and funds the trust; the trustee, who manages assets and distributions; the non-charitable beneficiary, who receives income payments; and the charitable remainder beneficiary, the qualified charity receiving remaining assets when the trust term ends.

A standard CRUT involves annual revaluation of trust assets. Beneficiaries receive an annual payment, known as the unitrust amount, which is a fixed percentage of this revalued principal. The payout must be between 5% and 50% of the trust’s fair market value annually, as per IRS regulations.

A CRUT differs from a Charitable Remainder Annuity Trust (CRAT) primarily in how the income stream is determined. A CRAT pays a fixed dollar amount each year, determined at inception, which does not change and does not allow for additional contributions. In contrast, a CRUT’s payments fluctuate because they are based on a percentage of the trust’s value, revalued annually, and additional contributions are permitted.

The revaluation aspect means the income stream can increase if trust assets grow in value, providing a hedge against inflation. A CRUT must also meet the 10% remainder test, meaning the present value of the charitable remainder interest must be at least 10% of the net fair market value of the property contributed to the trust at the time of contribution.

The Specifics of a Net Income with Make-up Charitable Remainder Unitrust

A Net Income with Make-up Charitable Remainder Unitrust (NIMCRUT) distinguishes itself from a standard CRUT through its unique income distribution rules.

The “Net Income” component dictates that annual distributions to non-charitable beneficiaries are limited to the actual net income earned by the trust in a given year. This limit applies even if the calculated unitrust payout percentage would be higher.

The “Make-up” component differentiates it. If the trust’s actual net income in a year is less than the calculated unitrust payout percentage, a shortfall is tracked in a “make-up account.” In subsequent years, if the trust’s income exceeds the stated payout percentage, excess income can make up accumulated shortfalls from prior years.

This structure is particularly useful when contributing non-income-producing assets like highly appreciated stock or undeveloped real estate. Initially, the trust might generate little to no income, limiting distributions. However, once assets are sold and reinvested into income-producing holdings, the make-up provision allows for larger distributions to recover past shortfalls. This flexibility also makes NIMCRUTs suitable for deferred income planning, such as preparing for retirement.

For example, if a NIMCRUT’s calculated payout is $7,000 but only earns $5,000 in income, the beneficiary receives $5,000, and a $2,000 shortfall is tracked. In a later year, if the trust earns $10,000 when the calculated payout is $7,000, the beneficiary can receive the current $7,000 plus the $2,000 shortfall, totaling $9,000.

Establishing a NIMCRUT

Establishing a NIMCRUT involves several preparatory decisions and the drafting of a formal trust agreement.

Donors must select a trustee: an individual, corporate trustee, or combination. Trustee choice influences management style and administrative fees, typically 0.5% to 2% of trust assets annually.

Donors also identify the charitable beneficiary or beneficiaries, ensuring they are qualified IRS organizations. The non-charitable beneficiaries, who receive the income stream, are also named, along with the payout term (lifetime or up to 20 years).

The payout percentage is another important decision, as it must fall within the IRS-mandated range. The trust must also satisfy the 10% remainder test, requiring the present value of the charitable remainder interest to be at least 10% of the initial fair market value of contributed assets. This calculation uses IRS actuarial tables under Internal Revenue Code Section 7520.

Required information for drafting includes personal details of the donor and all beneficiaries, names and tax IDs of chosen charities, and details about assets to be transferred. This includes fair market value and cost basis. Commonly contributed assets include appreciated securities, real estate, or other valuable property.

The legal drafting phase involves working with an attorney to create the trust document, ensuring full compliance with all IRS regulations for charitable remainder trusts. The trust must be irrevocable.

Operating and Managing a NIMCRUT

Once a NIMCRUT is established and funded, its ongoing operation requires specific annual procedures and responsibilities from the trustee.

A central aspect is the annual revaluation of the trust assets to determine their fair market value. This revaluation forms the basis for calculating the unitrust amount for the upcoming year.

The trustee is responsible for calculating the trust’s actual net income each year, based on fiduciary accounting income, as specified by state law and the trust. The distribution amount is then determined by comparing this actual net income to the calculated unitrust amount. The beneficiary receives the lesser of these two figures.

If the actual net income is less than the unitrust amount, the difference is recorded in the make-up account, accumulating any shortfalls from prior years. In subsequent years, if the trust’s net income exceeds the current year’s unitrust amount, the trustee can use this excess to pay down the accumulated balance in the make-up account, in addition to the current year’s distribution. This allows for deferred income realization, which can be strategically managed to align with the beneficiary’s financial needs or tax planning.

The trustee’s ongoing duties extend beyond income calculation and distribution. They include prudent investment management of trust assets, adhering to the Uniform Prudent Investor Act, requiring diversification and a balanced approach. Accurate financial record-keeping and accounting are also essential to track income, expenses, distributions, and the make-up account balance.

The trustee must also communicate regularly with beneficiaries regarding distributions, investment performance, and any changes in trust value or income. Compliance with the trust agreement and all relevant federal and state regulations, including Internal Revenue Code Section 664, is a continuous responsibility.

Tax Implications of a NIMCRUT

A NIMCRUT carries several distinct tax implications for the donor, the non-charitable beneficiary, and the trust itself.

For the donor, an immediate charitable income tax deduction is available. This deduction is for the present value of the charitable remainder interest, calculated at contribution using IRS actuarial tables.

Contributing highly appreciated assets to a NIMCRUT avoids immediate capital gains tax on appreciation. As a tax-exempt entity, the trust can sell these assets without capital gains tax, reinvesting the full proceeds.

Assets contributed to a NIMCRUT are removed from the donor’s taxable estate. This reduces potential estate taxes, offering an estate planning benefit.

For the non-charitable beneficiary, distributions from a NIMCRUT are taxed under a four-tier system, as outlined in Internal Revenue Code Section 664. Distributions are first treated as ordinary income (Tier 1) to the extent of the trust’s current and accumulated ordinary income.

Next, distributions are considered capital gains (Tier 2), followed by tax-exempt income (Tier 3), and finally, return of principal (Tier 4). This “worst-in, first-out” rule means that the highest taxed income is distributed first. For example, if the trust sells an appreciated asset, the capital gains are passed through to the beneficiary before any tax-exempt income or return of principal.

The charitable remainder beneficiary, a qualified public charity, receives remaining trust assets tax-free when the trust term ends. The NIMCRUT, while tax-exempt, must file an annual information return with the IRS, Form 5227, “Split-Interest Trust Information Return,” reporting its financial activities.