IRS permits NIMCRUT to invest in deferred annuities.

• Author: Lee, Shirley K.
• Position: Net income charitable remainder unitrust

On Jan. 9, 1998, the IRS issued an unpublished technical advice memorandum (TAM) involving an investment by a net income charitable remainder unitrust (NIMCRUT) in deferred annuities. The outcome of this ruling is surprisingly favorable in light of the Service's previous opposition to income deferral investment strategies undertaken by NIMCRUTs to control the receipt of distributable income.

A NIMCRUT is a CRUT with a make-up provision. Unlike a standard CRUT, the principal of a NIMCRUT is not available for distribution to income recipients if the trust fails to earn enough distributable income. To mitigate this restriction, however, a NIMCRUT make-up provision permits the trust to schedule income distributions that could not have been made in the past to be made up in the future, when excess distributable income is later earned. A deferred annuity is a contractual promise to make periodic payments that will begin at a contingent date and a guarantee that the payments will continue for either a stated number of years or until the death of a named annuitant.

In the unpublished TAM, the NIMCRUT was originally funded with stock of a closely held corporation. The trust named the donor and his spouse as current life income recipients with the donor's nephew as the initial trustee. The trust sold the stock and bought two tax-deferred annuity contracts from a commercial life insurance company. Both the sale of the stock and the purchase of the annuity policies were authorized by an unrelated attorney who served as an interim trustee. The donor and his spouse were the initial annuitants. The NIMCRUT was designated the owner and the beneficiary of the policies if either annuitant failed to reach age 80. Subsequently, the donor and his spouse assigned their interest in the policy to the NIMCRUT Both the trust instrument and the applicable state law are ambiguous on whether a trust's right to receive money results in income to the trust.

The IRS determined that the purchase of the deferred annuity was not an act of self-dealing, that it did not disqualify the trust as a charitable remainder trust, and that no trust accounting income was created until the trust received money or other property. The Service reasoned that the donor's annuity rights in the policies were contingent on the owner-trust's action, so the donor did not receive a current benefit from the policies. The issue of self-dealing also turned on whether the income deferral was a...