Using a Spigot Charitable Remainder Trust to Reduce Income Taxes

If you are interested in controlling when you pay capital gains tax on your assets, a charitable remainder unitrust (CRUT) may be a good option for you. A CRUT allows you to donate assets and receive income from the donated assets for life or a set number of years. After the end of your life or the specified term (up to 20 years), the assets are transferred to a charity of your choice.

CRUTs also allow for a “net income” provision and a “make-up” provision. The net income provision states that the lesser of earnings on the assets or a fixed percentage of the trust assets (the unitrust amount) is payable to the CRUT owner each year. A “net income” CRUT may also take advantage of the “make-up” provision, which will allow you to shift the income of the trust forward to future years if the income of the trust is higher than the standard unitrust payment. If both of these provisions are included in the CRUT, it is generally referred to as a NIMCRUT.

A NIMCRUT provides several notable benefits. First, it allows the receiver of the trust income to defer that income by holding the NIMCRUT assets within a single-member LLC. Because your LLC is not taxed as a corporation (the income flows through to the individual member/owners), you do not pay corporate taxes on the capital gains generated by the NIMCRUT. Second, because the NIMCRUT only receives income actually paid from your LLC, the NIMCRUT will no longer have to make payouts to the receiver of the trust income as long as you do not distribute income to the NIMCRUT. As such, we can use the “make-up” provision to shift taxable income forward to future years when your income tax bracket is lower by distributing income from the LLC to the NIMCRUT in those future years. This is an excellent strategy because one of the drawbacks of a CRUT is that payments to you or your beneficiaries during your lifetime are taxed, and you are deferring taxes to a later date by utilizing the “make-up” provisions. 

To set up this style of NIMCRUT for yourself, you transfer assets into your solely owned LLC and transfer the ownership of the LLC to the NIMCRUT. Of course, any small mis-step and this whole strategy is invalid, resulting in higher income taxes and the loss of any tax deductions. Furthermore, you must work with an attorney with a strong understanding of business law to set up the LLC. 

This strategy allows you to control the timing of your own distributions from a CRUT, in order to pick and choose the years when you’d like to pay taxes on your distributions. This can provide significant tax savings compared to paying taxes subject to the “make-up” provisions in later years (you do not get to choose). For more information on NIMCRUTs, or other valuable tax planning strategies, contact The Law Offices of Tyler Q. Dahl today.

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