Most client situations don’t call for a Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT), but the design is powerful in a narrow lane. It’s built for donors who hold low‑yield, highly appreciated, often illiquid assets and would be poorly served by a pay‑all unitrust.
During the early years, a NIMCRUT ties distributions to fiduciary accounting income, so there’s no need to sell or borrow just to make payouts; any shortfall accrues in a “makeup” account for later catch‑up when real income arrives.
The case study below shows how a flip NIMCRUT funded with restricted pre‑IPO stock can defer payouts until a liquidity event, then convert to steady retirement income while preserving a meaningful charitable remainder.
Facts
- Donor: Dana, age 58.
- Assets: Restricted, unmarketable pre‑IPO shares; FMV ≈ $6.5M; very low basis; negligible dividends or little to no fiduciary accounting income.
- Goals: Defer payouts until after a liquidity event; align income with retirement; provide a meaningful charitable remainder.
Structure
Dana, our donor, does the following:
- funds a NIMCRUT with the restricted stock
- sets a 6% unitrust rate
Because payouts under a NIMCRUT are the lesser of the unitrust amount or fiduciary accounting income, any shortfall accrues in a “makeup” account to be paid out in later high‑income years.
NIMCRUT flavor matters now.
Before a sale, Dana’s stock produces little or no accounting income, so annual payouts can be zero without violating the trust, avoiding forced sales or loans just to meet a fixed unitrust distribution. That’s the core advantage of Dana’s income‑exception/NIMCRUT design.
How NIMCRUTs flip to standard CRUTs at liquidity.
Dana’s trust is drafted as a flip NIMCRUT. It starts as NIMCRUT.
It automatically converts to a standard “pay‑all” unitrust in the tax year after a permitted, non‑discretionary triggering event. A classic trigger is the sale of “unmarketable assets”, e.g., restricted pre‑IPO shares. By rule, the flip occurs on January 1 of the following year.
Here’s what happened after the sale.
Dana’s shares are sold in Year 3.
From January 1 of Year 4 onward, Dana’s trust is a standard unitrust: it distributes 6% of its annual fair market value each year.
In those higher-income years (post-sale dividends/interest), Dana’s co-trustee began paying from the makeup balance accumulated during the low-income years, to the extent permitted by the ordering rules and the trust’s definition of income.
Key drafting & administration points that made Dana’s strategy work.
How we treated capital gains and makeup.
Fiduciary accounting income—not tax income—controls payouts. Capital gains are principal by default; if the governing law and the instrument permit, some of Dana’s post-contribution gains may be considered income.
It was important not to treat pre‑contribution value as income. Instead, we granted the trustee the power of impartiality only to the extent permitted by state law.
We defined triggers correctly.
The flip NIMCRUT was tied to a permitted, objective event, i.e., “the year after the trust sells unmarketable assets,” and we avoided discretionary triggers.
We confirmed the asset as unmarketable.
Mirror the regulatory definition in the document, e.g., closely held or unregistered/restricted securities.
We designed Dana’s CRUT to pass CRT tests.
The CRUT must satisfy the 10% remainder test and other §664 conditions; payouts must be between 5% and 50% of the account value.
We paid attention to step‑transaction risks.
It was critical to avoid any binding commitment to sell before funding the CRT.
Proper administration and valuation were critical.
Qualified appraisals and proper valuation methods were used for Dana’s unmarketable assets, and annual valuations during the NIM phase were well-documented.
Why didn’t we choose a standard CRUT for Dana?
With an illiquid, non‑income‑producing asset, a standard CRUT would require paying 6% every year, even if the trust earns no income, forcing sales or borrowing. Dana’s NIMCRUT avoided that mismatch until the flip NIMCRUT.
And why not utilize a deferred Charitable Gift Annuity (CGA), or just sell now?
A CGA rarely accommodates large, concentrated, illiquid positions pre‑sale, and it lacks the NIMCRUT’s makeup flexibility.
An outright sale generates immediate tax exposure and cash Dana did not presently need or want; the NIMCRUT defers distributions, often taxed at the beneficiary level via the §664(b) ordering, until retirement‑timed years.
When is a NIMCRUT not a good fit?
A NIMCRUT may not have been desirable for Dana under the following conditions:
- Dana needed cash immediately—before the asset would produce accounting income.
- Governing law or the trust can’t validly treat any gains as income where makeup is essential.
- The asset is already marketable and produces yield. In this case, a standard CRUT is simpler.
- The plan can’t clear the 10% remainder test at a reasonable payout rate given current §7520 rates.
How §7520 rates change the value and viability of Dana’s NIMCRUT.
Because qualification and the charitable deduction depend on actuarial assumptions, the §7520 rate directly affects day‑one math for any CRUT, including NIMCRUTs. It does not, however, alter the NIM mechanics that govern cash flow before the flip.
Below, we’ll examine some hypothetical scenarios that do not directly pertain to Dana but are relevant to the value of this case study as a teaching tool.
What §7520 touches and what it doesn’t.
- Affects (on day one) the charitable deduction, PV of the charitable remainder, and the 10% minimum remainder test for CRUTs.
- Does not affect (year to year): NIM payouts (driven by fiduciary accounting income vs the unitrust amount), the makeup account rules, or the flip trigger itself.
When §7520 is higher:
- Larger deductions and easier qualification lead to more substantial remainder values.
- Flexible design maintains or even raises the unitrust percentage and still clears the 10% test; longer terms, or lives, are more feasible.
Planning Note: Select the best option within the three-month window to lock in a favorable rate when rates are high or rising.
When §7520 is lower:
- Smaller deductions and tighter 10% margins may require payouts and horizons to be trimmed in order to qualify.
- Constrained design leads to options such as lowering the unitrust percentage, shortening the term-of-years, or revisiting life‑measure choices.
Planning Note: In falling‑rate months, consider electing one of the two prior months if they carried a higher §7520.
What stays the same in any rate environment?
During the NIM phase, the trust pays the lesser of unitrust percentage or fiduciary accounting income; shortfalls accrue to make up.
A valid flip converts in the calendar year after a permitted, objective trigger, e.g., sale of unmarketable assets.
Post‑flip, the CRUT must pay the full unitrust percentage annually; makeup can be paid as income permits, subject to ordering rules.
Here’s a quick checklist for using §7520 wisely.
- Run the 10% remainder test early at the desired payout; if tight, test 5.0–5.5% and/or a term‑of‑years design.
- Use the three-month election to capture the best available §7520 rate.
- Align economics: if the asset is truly illiquid/low‑yield pre‑sale, the NIMCRUT still solves the cash‑mismatch problem regardless of rate.
Is Dana’s NIMCRUT grantor or a non‑grantor? Does it require an independent trustee?
A NIMCRUT is a §664(c) tax‑exempt, non‑grantor split‑interest trust in terms of income tax status. It files Form 5227, requiring that beneficiaries, rather than the owner, are taxed on distributions under the §664(b) tier rules.
From a gift/estate perspective, the donor (Dana) made a completed gift of the remainder to charity. If someone other than the donor had been the income beneficiary, there would have been a taxable gift of that interest, which is offset in part by the charitable deduction.
An independent trustee is not legally required.
The donor, Dana, can serve as trustee. That said, independence is often prudent when the trust will rely on UPIA income/principal adjustments, annual valuations of unmarketable assets, private foundation-style self-dealing safeguards, or disciplined flip triggering.
- Use an independent co-trustee (or distribution/administrative trustee) to adopt annual variations, make income/principal and makeup determinations, and certify the flip.
- Require independent appraisals for unmarketable assets; document all valuation decisions during the NIM phase.
- Draft tight conflict‑of‑interest and self‑dealing prohibitions; ensure any trustee compensation is reasonable and well-documented.
A flip NIMCRUT remains a niche, powerful tool that tax professionals can use for estate planning.
Structurally, Dana’s NIMCRUT aligned distributions with real income, allowed post-liquidity cash-flow planning, and delivered a meaningful current deduction with the correct administration of §7520.
Dana’s is a CLE example where strong drafting, valuation discipline, and an independent co‑trustee provided a strong and practical plan that aligned charitable giving objectives with retirement income needs.
