Net Income Make-up Unitrust & Tax Savings
There is a big difference between rivers and reservoirs. Rivers are formed by collecting water from tributaries and rain run off upstream and then pass the water downstream, while reservoirs receive water from similar sources but hold the water in stagnation. One might say that rivers are conduits of water and reservoirs are containers of water.
Jesus told a parable that shows the danger of living life as a reservoir. In Luke 12:13-21, Jesus was approached by a man who is unhappy about the division of his father’s estate. In Jewish law, the first born son would receive a double portion of the inheritance. If there were two sons, the estate would be divided into thirds, with the eldest son receiving 66% and the younger son receiving 33%. Apparently, the younger son wanted Jesus to talk to his older brother and convince him to divide the estate equally. To that request, Jesus gave a clear warning against yearning for increase (greed), and followed it up with a parable about a rich man.
In the parable, the fertile land produced fine crops. The parable doesn’t say that the man worked hard or pulled himself up by his own bootstraps. The crops were a blessing from God, but the rich man took the credit and claimed ownership. The bountiful harvest was so plentiful that the rich man did not have enough storage to contain his crops. So the rich man decided to tear down his barns and build bigger ones in order to enjoy his remaining days in comfort and leisure. But God had other plans. He said, “You fool! You will die this very night. Then who will get what you worked for?” Suddenly, the man is left with no land, no crops, no barns, and no life. The lesson of the story, according to Jesus, is plain: “A person is a fool to store up earthly wealth but not have a rich relationship with God.”
Because we are blessed by God we do have an abundance of material possessions. Our assets are, in many cases, so vast that we need paid professionals to help us keep them secure and at work. We may not have the literal need to build a bigger barn, but we certainly are open to bigger portfolios. And it takes a lot of energy and expense to manage all of the blessings, which can often lead to worry, anxiety and stress. But what if this “problem” is really an opportunity? What if, instead of building bigger barns, we decided to open the doors of the barn we have and share the crops with those who have needs? What could happen if we decided to live as rivers instead of reservoirs?
Jim and Jenny Gold, both age 68, own a second home in Michigan that they no longer use. With their children now married, the Golds now rarely use it and it sits empty much of the year. They bought the home twenty years ago for $150,000 and it has now appreciated to $1,000,000.
They had considered selling the home but shied away because of the $164,000 capital gain tax.
At a meeting with their financial planner, they learned that a charitable remainder trust can be used to avoid the capital gain tax on the sale of the vacation home, create a flexible source of retirement income and create a family fund to involve their children in charitable giving.
Putting their plan in place, the Golds' financial planner determines that a Net Income with Make-up Unitrust (NIMCRUT) is the appropriate trust format to provide flexible retirement income. For contributing to a 7% NIMCRUT, the Golds will receive an income tax charitable deduction of $269,000. The proceeds from the sale of their unused home will be reinvested in deferred annuity contracts, which they expect to grow in value at 8% per year. The annuities allow the Golds to delay the receipt of income until they need additional funds and to accumulate the amount deferred for potential distributions at a later date. The Golds plan to defer income for the first seven years, at which time they plan to start withdrawing 4% annually. While they could choose to never make a withdrawal, this is their starting plan. Jim and Jenny understand that in order to receive any income under this strategy, the value of the annuity contract must be greater than the investment in the contract at the time of each distribution. However, by allowing for a seven-year growth period, they are increasing the likelihood that the annuity will grow in value.
At the death of the second spouse, the assets of the charitable trust will pour over to the Gold Family Donor- Advised Fund (DAF). Jim and Jenny name their investment advisor to manage the DAF's assets and name their children as Grant Advisors to the DAF for making recommendations for future grants to their church.
By transferring their unused home to a CRT, the Golds avoided the capital gain tax and created both a residual source of income, should they ever need it, and a social inheritance through their Family Donor- Advised Fund.
People of mature faith are those who can identify with the words of Jesus' half-brother, the Apostle James, who wrote, “Whatever is good and perfect is a gift coming down to us from God our Father, who created all the lights in the heavens. He never changes or casts a shifting shadow” (James 1:17, NLT). James’ words affirm that the blessings we have been entrusted with come from the hand and heart of God, who consistently bestows his gifts for us to steward.
The parable Jesus shared calls for us to respond to two important questions. First, how much is enough? Am I content with the blessings I have? Or do I find myself yearning for an increase?
The second question is this: Do I want to be a river that enjoys the blessings of God and passes them forward as a conduit to future generations to continue the work of God’s Kingdom? Or do I want to be a reservoir, amassing more and more of God’s blessings until I can no longer contain them?
Your church has existed and continues to exist because people from all walks of life have chosen to live as conduits and not containers. And you have received ministry and maturity from their generosity. Now, you are uniquely positioned to become a life giving conduit to the great work of building God’s Kingdom through your Church. Think of the transformative impact your participation can make not only now, but for years to come.
The leadership of your church has made it possible for you to join others in opening the doors of your personal storehouse and make a transformative gift that can produce lifetime income, reduce taxes, leave an inheritance to your children, and most importantly, increase the size of heaven.
