Net Income With Make-Up Charitable Remainder Unitrust (NIMCRUT) - Term Of Years, Inter Vivos

Net Income With Make-Up Charitable Remainder Unitrust (NIMCRUT) - Term Of Years, Inter Vivos

Story posted in Charitable Remainder Trust on 20 March 2001
audience: PGDC Network | last updated: 15 June 2011
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Facts and Goals:

Hugh Jones, a 55 year old male, desires to make a gift to a public charity that he believes provides valuable services in his state. He has accumulated $100,000 of marketable securities over the years. Hugh's basis in the securities is $10,000 and he has held them for several years. Hugh would like to sell these securities so that the proceeds could be reinvested in assets that would generate a higher return. Although Hugh believes these securities might be appropriate for his charitable gift, he is concerned about paying capital gains taxes on the appreciation if the securities are sold. While Hugh does not necessarily need much income from the assets currently, he would like to receive more income during the next 20 years as the assets appreciate further in value. Hugh also wants income payments at least annually but does not want a fixed payment amount, like an annuity.

Planning Strategy:

Hugh's advisors suggest that he use the marketable securities to create a net income with make-up charitable remainder unitrust, or NIMCRUT, naming himself as the sole non-charitable beneficiary for a 20-year term.

The advisors explain that a term-of-years, inter vivos NIMCRUT is an irrevocable trust that provides for a distribution, at least annually, to an individual for a specified term of the lesser of (i) trust net income or (ii) a fixed percentage which is not less than 5% nor more than 50% of the net fair market value of the trust's assets valued annually. For purposes of determining the proper annual payout amount, the NIMCRUT assets will be valued at the beginning of each year. The fixed percentage will be paid only from the NIMCRUT's net income and, if the net income is insufficient, deficiencies will not be made up from principal. However, deficiencies may be made up in future years if there is income in excess of the amount needed to make the regular annual payouts in such years. At the end of the NIMCRUT's term, the remainder of the NIMCRUT's assets will be paid to the public charity named in the trust instrument.

The advisors tell Hugh that he may serve as the trustee of the NIMCRUT or he may name a different trustee. The advisors also note that while the charitable remainder interest is irrevocable, Hugh may retain the right to change the charity named in his trust instrument.

Action Taken:

After several meetings with his advisors, Hugh decides to create a 20-year NIMCRUT with a 7% payout, with payments to him at the end of each calendar quarter.

Benefits:

Income Tax Benefits: Hugh will be entitled to a charitable income tax deduction for the present value of the charitable remainder interest in the year of the gift. If he is unable to use the full charitable income tax deduction in the year of the contribution, the unused portion of the deduction may be carried forward for 5 years. Because the NIMCRUT will not be subject to taxation (unless it has unrelated business taxable income), it will not be taxed on the capital gains incurred when the securities are sold. As a result, the NIMCRUT may reinvest the full value of the sales proceeds.

Gift Tax Benefits: Hugh will be entitled to a charitable gift tax deduction equal to the present value of the charitable remainder interest in the year of the gift.

Estate Tax Benefits: Because of Hugh's retained interest in the NIMCRUT, the fair market value of the NIMCRUT at the time of his death will be included in his estate for federal estate tax purposes if he dies before the termination of the NIMCRUT. However, his estate will be entitled to an offsetting charitable deduction for that amount.

Philanthropic Benefits: Charity will receive the balance of the assets in the NIMCRUT at termination.

Illustration:

Hugh's advisors run charitable projections showing that the present value of the charitable remainder interest will be $24,920. Hugh will be entitled in the year of the gift to an income and gift tax charitable deduction in this amount, based upon the following assumptions:

Hugh's Age:                                55
NIMCRUT's Term of Years:               20
IRS Discount Rate:                         7%
NIMCRUT Payout Rate:                           7%
Fair Market Value of Contributed Assets:           $100,000
Federal Income Tax Rate:                       39.6%
Federal Capital Gains Tax Rate:                20%


If Hugh is able to fully use the income tax charitable deduction in the first year (after applying the appropriate percentage limitations), his income tax charitable deduction will be $24,920, resulting in an income tax savings of approximately $9,868 ($24,920 x 39.6%). He also avoids capital gains taxes of $18,000 ($90,000 x 20% capital gains rate) when the securities are sold by the NIMCRUT.

Assuming Hugh survives the term of the NIMCRUT and assuming the NIMCRUT assets appreciate in value by 8% annually and also earn 2% income annually, Hugh's payments will increase over the years. The projections prepared by his advisors show that Hugh's total payments will be $92,000 resulting in total after-tax benefits to him of $55,000 over the existence of the NIMCRUT and that charity will receive $466,000 at the termination of the NIMCRUT.

If Hugh dies before the termination of the NIMCRUT, the fair market value of the NIMCRUT at the time of his death will be included in his estate and his estate will receive an offsetting estate tax charitable deduction in that amount.

Summary:

By giving his appreciated marketable securities to an inter vivos NIMCRUT and naming himself as the sole non-charitable beneficiary, Hugh can provide substantial benefits to charity while also avoiding capital gains taxes on the sale of the securities and maintaining a flow of income from them for a specified period of time.

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