Charitable Trusts, Day Eight: The NIMCRUT, Part Two

In addressing Split-Interest Trusts we’ve seen that they are unique types of trusts that are established to benefit both charitable and non-charitable recipients.  These trusts are designed for those who have both philanthropic and family needs to attend to.

The final type of Split-Interest Charitable Trust we’re covering is the Charitable Remainder Unitrust with Net Income Make-up Provisions (“NIMCRUT.”)

To quickly recap Charitable Remainder Trusts: in the simplest of terms, they are irrevocable trusts that are created to reduce taxes.  First they provides funds for named beneficiaries for a specific period of time, then, after that specific period of time, the remainder of the trust is given to a pre-designated charity.  Until the trust’s assets are donated to charity, the grantor has the benefit of being able to use the assets as they see fit.

Charitable Remainder Unitrusts with Net Income Make-up Provisions (“NIMCRUTs”) are a type of trust that allows you to provide income to yourself or others for life, or a fixed term, and to receive a tax deduction while doing so.

The important difference with NIMCRUTs as opposed to other Charitable Remainder Trusts, is that NIMCRUTs don’t allow the usage of the trust’s principal for the payout of income. If there is insufficient income to meet the payout, the income beneficiary must wait until sufficient income exists. Until such time however, the income beneficiary’s “make-up account” will continue to build. Once income is sufficient, the income beneficiary will be entitled to the entire buildup in the “make-up account.”

The trust pays out only actual income it has earned.  If this payout of interest and dividends is less than the specified percentage as stated in the trust documents, the shortage is accumulated and paid to the beneficiary at some future date, which is where the name of the trust comes into play.  The Net Income Make-up Provisions kick in whenever this happens. The “make-up provisions” allows the trust to “make-up” any deficiencies (under the pre-set, fixed pay-out percentage) during any year in which the net income of the trust exceeds the fixed pay-out percentage.

For example, assume that the trust earns 6% in interest and 16% in unrealized capital gains during the current year. The beneficiary receives only the 6% earned interest with the 16% in unrealized capital gains being accumulated for distribution to the beneficiary at a future date when the recognized income in the trust is sufficient to affect the payout. In those situations where the trust has no income from interest and dividends, the shortage owed to the beneficiary is accumulated for future distribution to that beneficiary.

Do yourself a favor; if you think a NIMCRUT is right for you, consult a qualified estate-planning attorney.

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