The Greatest Diversification Story Never Told! The NIMCRUT

Why is this tax-advantaged diversification strategy so seldom discussed? Because the strategy involves leaving a modest amount to charity* at the second of the two of you die. But here’s the kicker: you get to take the tax deduction for the remainder interest today, not 40-years in the future when the remainder defaults to charity! Should you be talking to an advisor who can further educate you beyond the simplistic illustration below? Judge for yourself. We believe you will!

Fact Pattern

You are a veteran leader, age 60, retiring at age 65 at a company that has awarded you generous stock options and restricted stock. However, you and your accountant are concerned that capital gains tax may jump higher in 2022, so you have decided to trim some of the unrecognized capital gains in the held shares of your employer stock. As a result, not only are you working off some of the accumulated capital gains, you also achieve the added benefit of diversifying your portfolio away from its concentration in your employer stock holdings in preparation for retirement.

  • You are sitting on 15,000 held shares of your company stock with a cumulative value of $6,465,000 ($431/sh) and a basis of $1,890,000 ($126/sh).
  • You do not want income until five years post-retirement after exercising your last stock option grant.

The Customary Diversification Option A:

  • If you sell 5,000 shares valued at $2,155,000 today, then the immediate tax consequences are: $513,163!
    • Minnesota income tax on the embedded gain of $1,525,000 is a cool 9.85% = $150,213.
    • Federal long-term capital gains tax at 20% of the $1,525,000 gain = $305,000.
    • Net Investment Income Tax (NIIT) on a wealthy filer at 3.8% of the $1,525,000 gain = $57,950
    • Gross proceeds are $2,155,000 less total tax of $513,163 leaving you with a net $1,641,837 to diversify.

An Extraordinary Diversification Option B, The NIMCRUT:

  • You decide to put 5,000 shares into a tax-protected Trust called a NIMCRUT: Net Income with Makeup Charitable Remainder Unitrust.
  • You immediately sell your company shares and diversify your portfolio with ZERO TAX payable!
    • You are only giving a remainder in the proceeds to charity after you and your spouse have exercised lifetime withdrawal rights of 6% of the 12/31 trust balance every year. In addition, because the remainder interest is earmarked as a charitable gift, all investment activity occurring within the Trust happens tax-deferred like a 401K or deferred compensation plan, except you retain capital gain treatment on distribution!
  • You and your spouse may take your eligible 6% distribution annually or accumulate it for later use with a properly drafted trust. Thus, you have maximum distribution flexibility.
    • Though there are many different distribution options, in our example, we will assume that you would like a lump-sum deferred distribution of your original contribution, $2,155,000 in year 11, and then a 6% distribution each year after that for the rest of your joint lives.
    • Thus, out to age 95, the average annual distribution will equal $223,000/year as long as the Trust grows by an average 8%/year.
    • Cumulative distributions in years 11-25 equal $7,507,000 to your joint ages of 95.
  • Can this strategy get any better? YES, one additional factor:
    • Because the Trust designates a remainder interest going to charity, the IRS looks at your and your spouse’s age and awards an Income Tax Deduction in 2021, for what the IRS calculates to be the net present value of the charitable remainder interest at the second of the two of you to die.
      • In the fact pattern above, the 2021 tax deduction allowed would be $461,127!
    • Many clients who utilize this method will also sell additional held shares to create long-term capital gains equal to the 2021 deduction.
      • In the above fact pattern, an additional 1,512 held shares could be immediately sold to diversify outside of the NIMCRUT tax-free.
      • The IRS Tax deduction from the NIMCRUT contribution perfectly offsets the gain on sale of the 1,512 shares representing an additional tax-free diversification pool of $652,000 formerly held as company stock.
    • One last exciting observation: When you take distributions, you retain capital gain tax treatment!

Upon first glance, the NIMCRUT seems too good to be true. But, don’t let that make you nervous! Instead, our team helps senior executives and their families invest quality time to gather all of the facts to make the best decision for their families to create income after their paychecks stop.

Oh, the footnote *. Remember when we said charity gets the remainder interest? Well, “charity” can be your Donor Advised Fund (DAF) or a Family Foundation so that your children can control the ultimate charitable distributions.

Stoddard Barnhill

Phillip Barnhill

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The Bahnsen Group is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.

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About the Authors

Phil Barnhill, CLU

Private Wealth Advisor
Director of Risk Management

Stoddard Barnhill, CFP®

Private Wealth Advisor

For nearly 25 years Phil has worked exclusively with senior leaders of public and large private companies. Over the past six years Stoddard has been carefully mentored in this niche market, leading to a highly-specialized practice knowledge within the team. This focus on corporate executives and their family dynamics comes with significant insights into executive compensation, stock concentration, equity monetization, and the full life-cycle of a career in the C-Suite.

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