How Business Owners Can Keep More of Their Wealth and Leave a Legacy

We are proud to share the following article, recently published in Forbes. The focus was a strategy to reduce tax on the sale of a business in coordination with estate and charitable planning goals. 

A NIMCRUT is a trust that allows you to provide income to yourself or others for life, or for a term of years, and receive an immediate tax deduction. The owner of the NIMCRUT gifts assets into an irrevocable trust. The trustee then invests those assets and pays a predetermined percentage, at a minimum of 5%, to the beneficiary. The trust then distributes the interest earned. If the predetermined interest rate is not achieved one year, the trust can make it up in subsequent years when its earning exceeds that interest rate, thus accounting for the “makeup” provision of this type of trust. The tax deduction received by the grantor is equal to the property’s fair market value, less the current value of payments to be received from the trust in the future.

Business owners can find this strategy particularly helpful when the thought of paying a large tax bill upon the sale of their business seems particularly daunting. In that case, the company stock is gifted into a NIMCRUT. Upon a sale of the business, the cash proceeds are invested to create income, calculated using a stated fixed percentage. If the investments earn less income than the selected percentage, the trust will only distribute what is earned. This is referred to as net income and ensures that the trust principal always remains intact. For example, if the trust only generates 4% income in year one, and the set distribution amount is 5%, the trust will pay 4% in that year and can make up the 1% shortfall in subsequent years. Thus, the principal is not disrupted and can continue to grow. At the end of the trust term, the irrevocable remainder interest passes to charity, leaving an important legacy.

Additionally, a NIMCRUT is particularly useful for assets where income is difficult to generate and the asset isn’t readily marketable, such as real estate or stock in a closely held corporation. In this case, the investor can make up income payments in future years while enjoying growth of the underlying asset held in trust. For investors who are not as interested in annual income but are looking for a sizable tax deduction of the asset, this strategy can provide just that.

In our practice, we recently worked with a business owner who contributed a large portion of his company stock into a NIMCRUT, naming his children as beneficiaries to be paid yearly at the predetermined payout rate. Upon the end of this trust term, he has chosen a charitable foundation that is meaningful to him to receive the remaining assets. This was a win-win situation for his family, providing a lifetime income to his children and ultimately providing a meaningful impact to charity. Coming full circle, the results of a business sale will provide lifetime income for a family and support causes that make the business owner’s heart sing.

You can visit the original article here

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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