If you’ve spent more than five minutes around planned giving, you’ve probably noticed our love affair with acronyms. CRATs, CRUTs, NIMCRUTs, NICRUTs, Flip CRUTs – it sounds less like charitable giving and more like a bowl of alphabet soup served by an angry robot.
Let’s consider a question that trips up donors, fundraisers, and even seasoned financial planners alike: What on earth is a Net Income Charitable Remainder Unitrust (NICRUT) – or its fraternal twin a NIMCRUT for that matter – and how does it differ from a Standard CRUT or a CRAT?
To make sense of the NICRUT and NIMCRUT twins, first we have to meet their older siblings.
Think of the CRAT as the champion of predictability. When a donor sets up a CRAT, they put assets into a trust, and the trust pays out a fixed dollar amount every single year for life (or a set term of years).
If the trust starts with $1 million and specifies a 5% payout, the beneficiary gets $50,000 every year – come rain, shine, market boom, or stock crash. Whatever is left over at the end goes to charity.
There are downsides to the CRAT: inflation can erode that fixed payout over time, and you can’t make additional contributions to a CRAT once it’s set up.
Enter the Standard CRUT, the dynamic sibling. Instead of a fixed dollar amount, a Standard CRUT pays out a fixed percentage of the trust’s value, as recalculated every single year. If the investments do great and the trust grows to $1.2 million, a 5% payout delivers $60,000 that year. If the market dips to $800,000, the payout drops to $40,000.
Because the payout fluctuates with market value, a standard CRUT offers potential protection against inflation. Plus, donors can add more assets to it down the road (and get another charitable deduction if they do).
So far, so good. But here is where things get messy. Suppose a donor wants to fund a trust with a piece of commercial real estate worth $2 million or maybe illiquid shares in a closely held family business. These are great assets, but they have a glaring issue: they aren’t cash. It might take 12 to 24 months to find the right buyer and sell that building or there could be restrictions on selling the private shares.
If you put that property into a standard CRUT or CRAT, the trustee is legally required to make a payout to the donor starting in Year One. But where does the trustee get the cash if the asset hasn’t sold yet and isn’t generating income? They would be faced with an impossible choice: forced into a desperate “fire sale” to raise cash for the payout or distribute fractional shares of the asset (which is what the donor gave away in the first place!).
A NICRUT works like a Standard CRUT with one crucial safety valve: the trust pays out the fixed percentage OR the actual net income (interest and dividends) generated by the trust, whichever is less. If the trust’s assets generate $0 in net income this year – for example, while waiting for a buyer of a funding asset that produces no income – the trust pays out $0. No forced sale, no panicked borrowing, no defaulted trust payments.
Then, once the asset sells, the proceeds can be reinvested in liquid, income-producing stocks or bonds, and the normal stream of income begins.
The NIMCRUT is simply a NICRUT with a “make-up” provision, which allows the trust to make up for those missed payments during $0 income years if the trust happens to earn surplus income down the road!
When a donor is considering a gift of an illiquid asset, the NICRUT and NIMCRUT are clearly superior to a CLUT or CLAT. But there is room for improvement. The NICRUT or NIMCRUT will still be limited to distributing its net income in any year where its net income is less than its stated payout percentage.
This is precisely why the Flip-CRUT was invented. It begins as either a NICRUT or NIMCRUT that distributes only its net income, but then, upon the occurrence of some event (like the sale of that pesky asset), it “flips” and becomes a Standard CRUT that will distribute its full payout percentage every year going forward, even if it must invade principal to do it.
Here is the cheat sheet to keep them straight:
| Trust Type | Payout Formula | Best Used For |
| CRAT | Fixed dollar amount every year | Liquid assets when fixed, predictable income is the top priority |
| Standard CRUT | Fixed percentage of trust’s assets as revalued each year | Liquid assets (stocks, cash) that generate steady returns |
| NICRUT | Lesser of net income or fixed percentage | Illiquid or non-income assets (real estate, private stock) that take time to sell; donor wants to preserve principal for the charity |
| NIMCRUT | Lesser of net income or fixed percentage but can make up previous shortfalls | Same as NICRUT but with an added makeup feature; donor wants to preserve principal for the charity |
| Flip CRUT | Starts out as a NICRUT or NIMCRUT but then becomes a Standard CRUT | Illiquid or non-income assets with a plan to liquidate and diversify trust investments |
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The BDQ (Big Dumb Question) We’ve all been there: at some point during a presentation someone says, “This may be a dumb question, but…” and the presenter (hopefully in a gracious tone of voice) says, “There’s no such thing as a dumb question,” before providing the obvious answer. But sometimes, just to yourself, you have to admit you were wondering about the same thing. That’s the idea behind this occasional series we’re calling “The Big Dumb Question” (or BDQ). Our aim is to provide easy to understand answers to basic gift planning questions – the kinds of questions you may be reluctant to ask. We’ve got a list of topics in mind (see below). More Big Dumb Questions Here are some of the BDQs we have addressed or plan to:
If there are other BDQs you’d like answered, let us know. You can remain anonymous, of course! |