What If You Don't Need the Payments Right Away?

If you don't need your payments from your charitable remainder trust to begin immediately, consider one of the three additional types of unitrusts and their benefits.
  1. One of the most common types of unitrusts is called a net income with makeup unitrust (NIMCRUT). It offers great flexibility in retirement planning because income can effectively be deferred until later years. The trust pays the lesser of the fixed percentage specified by the trust agreement or the actual trust income. Such trusts provide, however, that in any year the trust income exceeds the fixed percentage payout, the excess must be used to make up any prior deficiencies.
  2. A second, but not as popular version called a net income unitrust (NICRUT) uses the same payout structure but without a makeup provision.
  3. The third common type of unitrust is the flip trust. It begins as a NIMCRUT or NICRUT and then "flips," or changes, to a regular payment unitrust during the term of the trust. The triggering events to enact the flip can be marriage, divorce, death, birth of a child, or the sale of unmarketable assets such as real estate or closely held stock. Real estate is commonly used to fund this type of trust, with payments delayed until after the real estate is sold.

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Your tax and legal advisors can help you determine whether any of these three unitrusts are right for you.

Case Study: Supplement Your Retirement Income

(The following is an illustration of how this type of donation works.)
Scenario: John is concerned about building sufficient assets for his retirement.

Charitable Solution: One solution is for John to make an annual contribution to a NIMCRUT. He can make contributions whenever he likes. The contributions are not subject to the limits on contributions to qualified retirement plans and provide a charitable income tax deduction in years when his income is high.

Main Benefits: The trust will begin to make distributions immediately, but those distributions will be small as long as the trustee invests the assets for long-term growth. Once John retires, the trustee can change the trust to generate more income, adding a supplemental income stream to his qualified retirement plan distributions.

Because John likely received less than the 5 percent distribution during his working years, he may receive more than 5 percent (up to the amount of prior years' undistributed amounts) in years in which the trust generates more. After his lifetime, the balance is paid to the charities of his choice.

To learn more about how a charitable trust could fit into your long-term financial plans, please contact Jackie Peterson at 507-933-7543 or jpeters9@gustavus.edu.