Hugh Jones, a 55 year old male, and Wilma Jones, a 53 year old female, who are husband and wife, desire to make a gift to a public charity that they believe provides valuable services in their state. They have accumulated $100,000 of marketable securities over the years, which are in their joint names and are not community property. Their basis in the securities is $10,000 and they have held them for several years. They would like to sell these securities so that the proceeds could be reinvested in assets that would generate a higher return. Although they believe these securities might be appropriate for their charitable gift, they are concerned about paying capital gains taxes on the appreciation if the securities are sold. While they do not necessarily need much income from the assets currently, they would like to receive more income in the future as the assets appreciate further in value. They also want income payments at least annually but do not want a fixed payment amount, like an annuity. In addition, they would like to make sure that the survivor of them will receive income from the securities after the death of the first spouse to die.
Hugh and Wilma's advisors suggest that they use the marketable securities to create a net income with make-up charitable remainder unitrust, or NIMCRUT, naming themselves as the non-charitable beneficiaries for their lives.
The advisors explain that a two-life, inter vivos NIMCRUT is an irrevocable trust that provides for a distribution, at least annually, to two individuals for their lives 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 Hugh and Wilma's lives, the remainder of the NIMCRUT's assets will be paid to the public charity named in the trust instrument.
The advisors tell Hugh and Wilma that either or both of them may serve as the trustee of the NIMCRUT or they may name a different trustee. The advisors also note that while the charitable remainder interest is irrevocable, either or both of them may retain the right to change the charity named in the trust instrument.
After several meetings with their advisors, Hugh and Wilma decide to create a NIMCRUT with a 7% payout, with equal payments to each of them at the end of each calendar quarter. The survivor will receive the payments for life after the death of the first spouse to die. Hugh will not retain the right to revoke Wilma's survivorship interest in Hugh's share of the NIMCRUT and Wilma will not retain the right to revoke Hugh's survivorship interest in Wilma's share of the NIMCRUT.
Income Tax Benefits: Hugh and Wilma 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 Hugh and Wilma are unable to use the full charitable income tax deduction on their joint return 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 and Wilma 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. To the extent that Hugh, as the older spouse, is deemed to make a gift to Wilma, Hugh will also be entitled to a gift tax marital deduction for the present value of Wilma's survivorship interest in Hugh's share of the NIMCRUT. The present value of Wilma's survivorship interest in Hugh's share is equal to the difference between the present value of Hugh's share of the NIMCRUT based on Hugh and Wilma's joint life expectancy and the present value of Hugh's share of the NIMCRUT based solely on Hugh's life expectancy.
Estate Tax Benefits: Because of each spouse's retained interest in the NIMCRUT, the fair market value at the time of death of the share of the NIMCRUT of the spouse who dies first will be included in his or her estate for federal estate tax purposes. However, his or her estate will be entitled to offsetting charitable and marital deductions for that amount. The availability of the marital deduction obviously assumes that Hugh and Wilma are married at the time of death of the first spouse to die.
Philanthropic Benefits: Charity will receive the balance of the assets in the NIMCRUT at termination.
Hugh and Wilma's advisors run charitable projections showing that the present value of the charitable remainder interest will be $13,090. Hugh and Wilma 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 Wilma's Age: 53 Joint Life Expectancy in Years: 35 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 and Wilma are able to fully use the income tax charitable deduction in the first year (after applying the appropriate percentage limitations), their income tax charitable deduction will be $13,090, resulting in an income tax savings of approximately $5,184 ($13,090 x 39.6%). They also avoid capital gains taxes of $18,000 ($90,000 x 20% capital gains rate) when the securities are sold by the NIMCRUT. Although Hugh, as the older spouse, may be deemed to have made a gift to Wilma of the value of her survivorship interest in his share of the NIMCRUT, he will be entitled to an offsetting gift tax marital deduction.
Assuming Hugh and Wilma live 35 years to joint life expectancy after the contribution and assuming the NIMCRUT assets appreciate in value by 8% annually and also earn 2% income annually, their payments will increase over the years. The projections prepared by Hugh and Wilma's advisors show that Hugh and Wilma's total payments will be $345,000 resulting in total after-tax benefits to them of $208,000 over the existence of the NIMCRUT and that charity will receive $1,479,000 at the termination of the NIMCRUT.
The fair market value of Hugh's share of the NIMCRUT at the time of Hugh's death, assuming he is the first spouse to die, will be included in his estate and his estate will receive offsetting estate tax marital and charitable deductions totaling that amount. The fair market value of the NIMCRUT will be included in Wilma's estate when she subsequently dies and her estate will be entitled to an offsetting estate tax charitable deduction.
By giving their appreciated marketable securities to an inter vivos NIMCRUT and naming themselves as joint non-charitable beneficiaries, Hugh and Wilma 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 the proceeds during their lifetimes.