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 […]
The Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT) is one of the most powerful and flexible tools in modern estate planning. It allows you to defer taxes on highly appreciated assets, generate an income stream for yourself, and leave a meaningful legacy to charity. But what happens when you want to extend those benefits to the next generation?
A common goal is to set up a NIMCRUT that pays income to you and your spouse for your lifetimes, and then “passes the torch” to your children, who become the next income beneficiaries. This is an effective way to provide for your family’s future while still fulfilling your philanthropic goals.
However, this multi-generational structure introduces several layers of gift and estate tax complexity. Let’s walk through the key tax events step-by-step to demystify the process.
Before diving into the tax details, let’s quickly recap the unique features of a NIMCRUT (here’s the in-depth guide if you want to learn more).
Unlike a standard trust that pays out a fixed amount every year, a NIMCRUT pays you the lesser of a fixed percentage of the trust’s value or the trust’s actual net income for that year.
If the trust’s income is less than the percentage you’re owed, the shortfall isn’t lost. It’s tracked in a “makeup account.” In future years when the trust’s income
exceeds the fixed percentage, it can pay out that excess to “make up” for the shortfalls from prior years. This structure is ideal for deferring income—you can invest in growth assets that produce little income for years, let them grow tax-free inside the trust, and then sell them later to generate the income needed for distributions.
The Question: When you create a NIMCRUT and name your children as successor beneficiaries, do you use up some of your lifetime gift exemption?
The Answer: Yes, you do.
When you fund the trust, you are making two distinct gifts: a future gift to charity (the remainder) and a future gift to your children (the successor income interest). The gift to your children is a taxable event that will likely require you to file a gift tax return (Form 709).
It is possible to structure the trust to make the gift to your children “incomplete” by retaining the right to cancel their interest in your will, which avoids an upfront taxable gift. However, for this discussion, we will focus on the more common “completed gift” scenario.
This is where the rules can seem counterintuitive. Many people assume that if they already accounted for the gift when the trust was created, there shouldn’t be another tax event when they pass away. However, the tax code works differently.
The Question: When the parents pass away, is the value of the trust included in their estate, even if they used their gift exemption when it was funded?
The Answer: Yes. Because you retained an income interest for your life, the full, current fair market value of the NIMCRUT’s assets is pulled back into the gross estate of the last-surviving parent for estate tax purposes. 13 This is required by a powerful “string provision” in the tax code, IRC § 2036, which deals with transfers where a life estate is retained.
The Question: So, is the whole trust taxed? Do you get any deductions?
The Answer: No, the whole trust is not taxed. After the full value is included in the estate, the estate immediately gets a crucial offsetting charitable deduction.
The tax system is designed to avoid double taxation. By pulling the full asset back into the estate, the tax code essentially ignores the initial gift calculation and re-evaluates the transfer based on its value at the time of death. The lifetime exemption you used upfront is effectively restored and applied against your total taxable estate.
This is a vital detail that cannot be overlooked. To maintain its tax-qualified status, a charitable remainder trust is prohibited from using its own assets to pay estate taxes.
This means the responsibility for paying the estate tax attributable to their inherited income stream falls directly on your children. In fact, most well-drafted NIMCRUTs state that a successor beneficiary’s interest is contingent on them providing the funds to pay this tax. If they fail to do so, they risk forfeiting their inheritance from the trust entirely.
The most common solution is to plan for this liquidity need in advance, often by using a life insurance policy owned by a separate Irrevocable Life Insurance Trust (ILIT) to provide the necessary cash.
Once the estate tax matters are settled, your children will begin receiving their income distributions. These payouts, including any distributions from the makeup account, are taxable to them. The character of that income is determined by a strict four-tier accounting system:
The trust must completely exhaust a higher tier before distributing from a lower one. This means that even if the trustee sells stock to realize a long-term capital gain to fund a distribution, your children might receive it as ordinary income if the trust has any accumulated interest or dividends. 2
Using a NIMCRUT to provide for both your own retirement and your children’s future is a sophisticated and highly effective strategy. It allows for multi-generational wealth transfer while supporting the causes you care about. However, its power comes with complexity. Understanding the gift and estate tax implications at each stage—from the initial funding to the final transition to your children—is essential for ensuring this powerful tool works as intended, providing security for your family and a lasting legacy for your chosen charity.
We’ve built a platform to give everyone access to the tax and wealth-building tools typically reserved for wealthy individuals with a team of accountants and lawyers. We make it simple and seamless for our customers to take advantage of these hard-to-access tax-advantaged structures. With Valur, you can build your wealth more efficiently at less than half the cost of competitors.
From picking the best strategy to taking care of all the setup and ongoing overhead, we make things simple. The results are real: We have helped create more than $3 billion in additional wealth for our customers. If you would like to learn more, please feel free to explore our Learning Center. You can also see your potential tax savings with our online calculators or schedule a time to chat with us!
