Insurance professionals have long been familiar with the myriad uses of life insurance in estate planning, particularly for charitable gifting. Less appreciated is the role that deferred annuity contracts can play in charitable planning.
One application for deferred annuities is as a funding vehicle for a special type of charitable remainder trust, known as a net income make-up charitable remainder trust (NIMCRUT). A NIMCRUT is a variation of the well-known charitable remainder unitrust.
The charitable remainder unitrust has long been a popular tax-planning vehicle for wealthy taxpayers with strong charitable interests. Appreciated property may be donated to the trust, and then sold, with no capital gains tax. The reinvested proceeds can be invested in a diversified portfolio to fund distributions to the donor and/or spouse for a fixed term of years or life.
In addition, the donor receives a partial tax deduction based on the age of the beneficiaries (or duration of the trust, if other than a life payout), the payout rate of the trust, and the prevailing federal interest rate, also known as the AFR or 7520 rate.
Many wealthy donors, however, dont need distributions paid by the CRUT for current living expenses. While they are unwilling to give up the right to receive the income in the future, they dont need it now. Also, they still must pay taxes on the distributions as they are paid out.
A NIMCRUT is one solution to this dilemma. Unlike a standard CRUT, which can make distributions from both income and principal, a NIMCRUT distributes only income generated by the trust assets. If trust income is not sufficient, the unpaid income is accumulated in a make-up account.
The idea is to invest the trust initially in assets that produce little or no income. When, and if, the donor desires distributions to start, the trust can be reinvested in assets that produce a high amount of income, which can be used to cover current distributions, plus distributions from the make-up account.
The advantage to the donor: He or she can take little or no income now, yet have the flexibility to generate a higher amount of income later, when needed.
NIMCRUT assets are commonly invested in a deferred annuity contract. Since the annuity pays no income currently, distributions are not paid to the beneficiary. The unpaid distributions accumulate in the make-up account. If the beneficiary wishes to start taking distributions years later, the annuity can generate the income at that time, funding both the regular distributions and the distributions from the make-up account.
As with any CRT, remaining trust assets go to the designated charity upon the beneficiarys death. The make-up account, if not depleted, will produce a higher amount for charity.
A donor who is concerned about the assets not going to the family can purchase a life insurance policy in an irrevocable life insurance trust (ILIT). In the early years, the donor would fund the premiums from personal assets. Later, the NIMCRUT could fund premiums through distributions.