The purpose of estate tax planning is to maximize the assets you pass on to future generations by minimizing gift and estate taxes. Estate-tax strategies revolve around the use of irrevocable trusts. This article discusses the most common types of irrevocable trusts that are used to minimize gift and estate […]
Understanding how you can manage your trust distributions in a NIMCRUT and how that affects the value of the CRUT is crucial so that you balance your cash needs with getting the highest ROI possible from the structure.
A CRUT is a tax-exempt structure with many tax benefits well suited for appreciated assets you have not yet sold. In exchange for donating some of the money in the trust to a charity, you can defer the taxes you would otherwise pay when selling an asset and grow your asset tax-free inside the trust. Plus, CRUTs give you an immediate charitable income tax deduction when you put the assets in.
A NIMCRUT is very similar to a Standard Charitable Remainder Unitrust, with one notable exception. With a standard CRUT, you receive a fixed percentage of the trust’s value as a payout every year, regardless of whether the trust’s assets grow or shrink in value or have 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.
If you need a quick reminder on how a NIMCRUT works, you can read any of these articles to get caught up.
For this article, we’ll review two scenarios, one were you don’t require any liquidity, and therefore you can hold the assets in the trusts without annual distributions, and another scenario where you require as much liquidity as possible each year and we see how picking and choosing what assets to sell can impact your trust distributions and make-up account.
We’ll use a few assumptions:
First year of the trust:
When you first set up your trust, after you contribute the assets, you’ll have the contribution value (that is, the fair market value of the assets you contributed, which, unless the assets are cash or public stock, you’ll need a qualified appraiser to obtain). This is the value that will matter for your charitable deduction, and it will also be important for the first year’s distribution. For this case study, we’ll assume that the contribution value is $1,000,000.
Generally, for a NIMCRUT to have a positive return, you’ll want to sell the asset you contributed in the short term, so let’s just assume that right after you contribute, the assets are sold. Let’s assume that the sale price is $1,010,000.
After the money from the sale comes into the account, you invest in a variety of public stocks and by the end of the year, the trust’s full value is $ 1,143,466.64, with $13,466.64 of that being dividends generated from the newly purchased assets. You decide not to sell the assets in the first year since you don’t need the liquidity.
How much trust distributions should you expect?
You have a NIMCRUT, meaning you’ll only distribute the minimum between the realized income and the unitrust amount, so let’s dive into what each of those look like.
Unitrust amount
The unitrust amount for the NIMCRUT is the following:
$latex \text{unitrust\textunderscore amount} = \text{end\textunderscore of \textunderscore year} * \text{payout\textunderscore rate}$
So in this case, the unitrust amount will be $125,781.33 = $1,143,466.64*11%
Realized income
Here there are two sources to consider for the realized income.
Summary of the first year
We need to see the lesser of the two numbers above ($23,466.64 and $125,781.33) to determine the trust’s distributions. So for the first year, you should only expect $23,466.64 (between the post contribution gain of $10,000 and the income generated by the assets) in trust distributions. These distributions will be taxed according to the four-tier accounting
What happens to the $102,314.69 remaining from the unitrust amount, which is what the trust owes you? This will go into the make-up account, and carryover as owed distributions to the second year of the trust.
Second year of the trust
When you start the second year of the trust, its value is $1,143,466.64 – $23,466.64 = $1,120,000.
For this example, we’ll assume that during this second year, the assets don’t grow, nor do they generate dividends. This means that by the end of the year, the trust is still worth $1,120,000. How much distributions should you expect for this second year?
Repeating the process we did for the first year, it’s clear that since no income was generated, you won’t receive any distributions this year. But what about the unitrust amount and the make-up account?
The unitrust amount for the second year comes up to $123,200 (11% * $1,120,000). This will add to the previous makeup amount ($102,314.69), meaning that the make-up account is now worth $225,514.69.
Third year of the trust
By the end of the third year, the value of the trust has grown to $1,260,774.92. $31,511.94 of that being dividends from the assets.
This time, you want to get some distributions out, so you decide to sell all of the assets, meaning you realized a gain of $229,262.99. Let’s look at the expected distributions.
Unitrust amount
Following the same calculation we did previously, the unitrust amount for this year is $138,685.24.
Realized income
Between the realized gain from the sale, and the dividends generated you get a total of $260,774.92.
Trust Distributions
In this case, the unitrust amount is the lesser of the two, however, there are $225,514.69 in the make-up account, which is what the trust owes you from previous years. In total, the trust owes you $364,199.93, meaning you get to distribute the full realized income in the 3rd year of $260,774.92 on the third year and are left with a make-up account (or owed distributions) of $103,425.01.
Let’s say you want the liquidity quickly, so you don’t care about leaving the assets in. This means you want to maximize the trust’s distributions you take out every year. Repeating the numbers from the previous scenario, we need to make a few adjustments and clarifications. So let’s start with the first year.
First year distributions
To recap, by the end of the first year, the trust was worth $1,143,466.64 and had generated $23,466.64 of distributable income, between dividends and post-contribution appreciation. The unitrust amount is still $125,781.33 ($1,143,466.64*11%), but now we want to take out all those $125,781.33. To do this most efficiently, we need to take a deeper look into the performance of each asset. So let’s assume that with the proceeds from the sale, you bought three stocks, stock A for $336,666, stock B for $336,666, stock C for $326,666, and you kept $10,000 in cash.
End of the year comes, and here’s what each of those stocks is worth:
In total, you’ll see that the trust appreciated, but not all of the assets did. This means we can cherry pick which assets to sell, to realize a gain and distribute the full unitrust amount. In this case, we need to sell all of Stock C and about half of A to realize as much gain as we can. This means you realize $101,796.71 of distributable gain.
Including the dividends and post-contribution gain, your first-year trust’s distributions are $125,263.35. Now, the make-up account is only worth $258.99.
And let’s assume with the remaining proceeds from the sale ($474,901.02), you bought stock D.
Second year
Now the scenario is a bit different. The assets didn’t grow nor did they generate any income, so the trust’s value now is $994,477.66. You won’t get any distributions in the second year (since there’s no income or gain to realize), so the make-up account will grow, by the unitrust amount, which in this case will be $109,392.54 ($994,477.66*11%). The total of the make-up account now is $109,651.53.
Third year
For the third year, all the assets grew, and the trust’s value is now $1,058,591.65, with $41,852.29 worth of dividends from the assets.
The unitrust amount for the 3rd year is now $121,048.83 (($1,058,591.65+$41,852.29)*11%), which, added to the make-up account ($109,651.53), totals $230,700.36.
Once again, let’s look at the value of the assets to understand the composition of the trust.
You sell stock A and D, since they are the only ones that have appreciated, leaving you with a realized gain of $95,062.94. Adding this to the realized income from dividends, your expected trust’s distributions for the third year are $136,915.23 ($95,062.94+41,852.29).
| Scenario | Total Trust Distributions | Make-up Value | Account Value |
|---|---|---|---|
| Minimum Distributions Until Year 3 | $284,241.56 | $103,425.01 | $1,000,000 |
| Maximum Distributions Every Year | $262,178.58 | $93,785.13 | $921,676.42 |
There are different strategies that you can use when taking distributions in a NIMCRUT. Each will produce a different value (which we will dive into in a different article) and will depend on your liquidity necessity. But the key advantage of the NIMCRUT is the ability you have to pick and choose which gain (or loss) to realize, in order to control the yearly distributions.
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