NIMCRUTs Encourage Charity While Nurturing Financial Security

Both NIMCRUTs and CRUTs are typically used to generate income, providing clients with a trust distribution each year, the amount of which can fluctuate with the trust's performance. With a CRUT, the trust is re-evaluated each year for income purposes. If the value of the underlying investment increases, so can the income. A NIMCRUT goes an extra step, including a "make-up" provision to guard against "off" investment years, allowing the client to recoup income in better years.

To illustrate, consider Alex Ruggerio, 52, a children's book author, and his wife, Carol, 49, who illustrates their books. The Ruggerios have 3 important financial goals: (1) to retire comfortably when Alex turns 65; (2) to leave a meaningful gift to a local children's library; and (3) to leave a financial legacy for their children.

Having donated both their time and talents to the library, they want to see their work continue. But they also fret about how a sizable gift would affect their children's inheritance. After speaking with their financial professional and legal counsel, the Ruggerios' attorney creates a NIMCRUT, naming the children's library as beneficiary. The couple transfers to the NIMCRUT an appreciated stock portfolio generated from their book royalties that has built-in gains of $1 million.

They also appoint as trustee one of their adult children: someone who understands their financial needs and is sympathetic towards them. The trustee invests the couple's money in a variable annuity. Because the trust is established for a charitable purpose and is therefore tax-exempt, Alex and Carol avoid paying capital gains taxes on the investment sale proceeds. They also receive an income-tax deduction for their charitable contribution. The amount of the tax deduction is determined by several factors: (1) the Ruggerios' life expectancies; (2) the projected amount of investment income they will receive; and (3) the applicable federal interest rate.

To ensure their children are not disinherited, the Ruggerios pay $22,468 a year for 13 years in premiums for a universal life last survivor insurance policy with a $2 million death benefit. The policy is owned by an irrevocable insurance trust (ILIT), which removes the policy's death benefit from the couple's taxable estate (though there may be federal gift tax consequences associated with the funding of an ILIT).

The income tax deduction the Ruggerios receive for their charitable gift helps offset the cost of the policy. Life insurance policies and annuities contain fees and expenses, including the cost of life insurance, administrative fees and premium loads, surrender charges and other charges or fees that may be incurred under the policy.

The annuity within the NIMCRUT is projected to accumulate to $1.96 million when Alex turns 65 based on a hypothetical 7% average annual return on the annuity. Upon Alex's retirement, the Ruggerios begin receiving a lifetime income stream from the NIMCRUT. The vehicle's built-in flexibility allows the trustee to control how much income the couple receives and therefore, how much income tax they pay on distributions.

If the annuity generates little or no earnings in any one year, the trustee can pay a higher amount in a succeeding year if returns improve. The amount of income can rise and fall as the Ruggerios' financial needs change.

When Alex and Carol die, the library receives the remaining trust assets, providing a generous endowment to hire a full-time children's librarian. Meanwhile, the couple's last survivor policy pays the ILIT a federal income- and estate tax-free death benefit of $2 million, replacing the value of the annuity in the Ruggerios' estate.

Summing Up

By embracing the benefits of a NIMCRUT, the Ruggerios are able to accomplish seemingly conflicting financial goals without compromising their charitable wishes, their children's inheritance or their financial security in retirement. Although the Ruggerios do not possess the capital muscle or might of a Buffett or a Branson, their charitable intentions are every bit as sincere and, more importantly for your practice, considerably more common.

Learn more about NIMCRUTs. They can help your clients accomplish a wide range of financial goals, both charitable and personal. With a proper strategy and the right incentive, NIMCRUTs can help your clients make their corner of the world a better place to live.