The Giving USA Foundation, which tracks philanthropy practices in the United States, reports that charitable contributions reached an unprecedented $260.3 billion in 2005. The trend continued in 2006 with a parade of billionaires making huge donations to support favorite causes. Warren Buffett, America’s second-richest man, led this year’s philanthropic derby by giving $31 billion to the Bill & Melinda Gates Foundation. Richard Branson, creator of Britain’s “Virgin” brand, announced a $3 billion contribution to the reduction of global warming. And the founders of Google earmarked $1 billion for a list of social- and global-improvement projects.
While the movers and shakers of the business world made huge splashes in the philanthropic pond, there were plenty of smaller but well-intentioned donations as well. Experts say this trend is expected to continue as the merely affluent follow the super rich in making charitable statements about what they envision as a better world. More might be encouraged to give if they learned about techniques that help preserve–or even enhance–their lifestyles as part of charitable giving.
A net income with make-up provision charitable remainder unitrust is one such technique. A NIMCRUT is a powerful tool that enables the affluent to simultaneously accomplish seemingly incongruous financial objectives:
? Maximize retirement income.
? Gain greater control of both future income and federal income taxes.
?Donate generously to the charity of their choice.
? Enjoy a partial tax deduction for their gift.
? Reduce their taxable estate.
? Replace the value of the gift for their heirs (in conjunction with the purchase of life insurance).
NIMCRUTs can be highly effective for affluent clients who are still preparing financially for retirement and have several years before they need to begin taking retirement income. Clients in this market have often exhausted tax-favored savings and investment vehicles such as IRAs and defined contribution plans; they are therefore often good candidates for an annuity.
A NIMCRUT is similar to a charitable remainder uni-trust (CRUT) in that both require that the client have charitable intentions. Both trusts also are irrevocable and are typically funded with highly appreciated assets. The client donates either the asset or proceeds from the sale of the asset to a favorite charity.
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.
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.