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.

• 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.

NIMCRUT distribution strategy

As you can tell by now, 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 payouts, 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 distributions in a given 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 example

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 (or, if you prefer, you can spread that deduction out over up to five years). 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

• Year 1 – Assume that by the end of the first year, your assets have grown by 8% (around the historical average for a diversified portfolio), from $500k to $540k. 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 $54k. As a result, that money is in your pocket, and the trust’s value is $486k.
• Year 2 – The assets have grown another 8%, from $486k to $525k. Once again, you are required to withdraw your 10%, which comes out to about $53k. That leaves your trust with $472k.
• Year 3 – The assets grow 8% once again, this time from $472k to $510k. You take your mandatory payout of $51k. At the end of three years, then, you’ve received $158k, and your trust still has $459k

Scenario 2: NIMCRUT

• Year 1 – Same assumptions here: By the end of the first year, your assets have grown by 8%, from $500k to $540k. 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 $54k. But because the trust has no income in this year, you receive $0, your trust still has $540k, and you have $54k in your make-up account.
• Year 2 – The assets have grown again, from $540k to $583k. 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 $58k. Your make-up account is now worth $112k, and your trust still holds the entire $583k.
• Year 3 – One more year of 8% growth, this time to $630k, and you’re again entitled to a 10% payout, or $63k. 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 $175k. Conveniently, that’s the precise value of this year’s 10% payout plus the amount in your make-up provisions. Working with Valur, you sell shares sufficient to create $175k 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 $175k, and your trust still holds $455k.

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 an extra $17k in your pocket after only three years. The gains from this strategy will only be larger the longer you leave your money to grow.

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 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.

For more information, please complete our Contact Form, our Questionniare, or email us at info@criterionadvisorsgroup.com.

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.