NICRUT or NIMCRUT? When the Makeup Account Actually Works

Short answer. A NICRUT and a NIMCRUT use the same net-income limitation: each year, the trust pays the lesser of the stated unitrust amount or its trust accounting income. The difference is that a NIMCRUT keeps track of prior shortfalls and may pay them later. But the makeup account is useful only if the trust will remain a NIMCRUT and can later produce enough trust accounting income to exceed the current year's regular unitrust amount. If the trust flips to a straight CRUT, any unpaid makeup amount is forfeited and added to principal.

Jurisdiction: Federal, with a California fiduciary-accounting note

Primary authorities: IRC §§ 643(b), 664(b), 664(d)(2), 664(d)(3), 664(e); Treas. Reg. §§ 1.643(b)-1, 1.664-3(a)(1)(i)(b), 1.664-3(a)(1)(i)(c)

Last reviewed: September 2026

Category: Charitable Remainder Trusts — Structure and Design

By Klaus Gottlieb, Esq.

The difference is one subparagraph

Monty Python gave us knights who demanded a shrubbery in exchange for a single syllable: “Ni!” Charitable trust practice gives us two acronyms separated by one letter and, as it happens, by one subparagraph of the Internal Revenue Code.

Both structures use the net-income exception in IRC § 664(d)(3). Instead of requiring the trust to pay the full stated percentage of its annually determined value, the governing instrument limits the annual payment to trust accounting income when income is lower.

A NICRUT—a net income charitable remainder unitrust—uses the rule in § 664(d)(3)(A). Suppose a 5% unitrust has a $2 million value for the year. The regular unitrust amount is $100,000. If trust accounting income is only $40,000, the beneficiary receives $40,000. The missing $60,000 is gone. It is not carried forward.

A NIMCRUT adds the makeup rule in § 664(d)(3)(B). The same $60,000 shortfall is tracked. In a later year it may be paid—but only from trust accounting income that exceeds that later year's regular unitrust amount. The makeup account does not create a right to invade principal.

That is the statutory difference. In other respects, both remain CRUTs. The stated percentage must be at least 5% and no more than 50%; the actuarial value of the charitable remainder must satisfy the 10% minimum remainder test; the trust is revalued annually; and distributions are characterized under the four-tier rules of IRC § 664(b).

The deduction is the same

For valuation purposes, IRC § 664(e) treats an income-exception CRUT as though the full stated unitrust percentage were paid each year. Accordingly, if the payout percentage, measuring lives or term, beneficiaries, valuation assumptions, and contributed property are otherwise the same, adding or omitting the makeup provision does not change the actuarial value of the charitable remainder.

So the deduction does not favor one over the other. The question is whether the makeup account is likely to be paid.

How makeup is actually paid

Take a 5% NIMCRUT worth $2 million. The regular unitrust amount for the year is $100,000. Assume the trust also has a $150,000 makeup balance from earlier years.

• If accounting income is $80,000: the beneficiary receives $80,000. The trust is $20,000 short for the current year, so the makeup balance increases from $150,000 to $170,000.

• If accounting income is $100,000: the beneficiary receives $100,000. That satisfies the current year exactly. The old $150,000 makeup balance is unchanged.

• If accounting income is $130,000: the beneficiary receives $130,000. The first $100,000 satisfies the current year. The remaining $30,000 pays down the old makeup balance, reducing it from $150,000 to $120,000.

The important word is income. Trust accounting income is not the same as total return. IRC § 643(b) looks to the governing instrument and applicable local law, subject to the federal regulations. Interest, dividends, rents, and similar receipts are commonly income. Appreciation is not automatically income merely because the trust has performed well.

The rule: current-year accounting income must first cover the current-year unitrust amount. Only the excess can be used for makeup.

Selling the contributed asset usually does not fill the makeup account

The sale itself usually does not create the income needed for makeup.

Treas. Reg. § 1.664-3(a)(1)(i)(b)(3) contains a special rule for capital gains. When the trust sells an asset contributed by the donor, the proceeds must be allocated to principal at least to the extent of the asset's fair market value when contributed. If the trust later buys an asset and sells it, the proceeds must remain principal at least to the extent of the trust's purchase price.

Gain above those protected principal amounts may be allocated to trust accounting income if the governing instrument permits it and applicable local law does not prohibit the allocation. Treas. Reg. § 1.643(b)-1 adds another guardrail: a definition of income that departs fundamentally from traditional fiduciary accounting principles will not be respected merely because the instrument says so.

Suppose a donor contributes real estate worth $2 million and the trustee soon sells it for about $2 million. The sale has not generated $2 million of trust accounting income. The proceeds are principal. A makeup balance that accumulated while the property was being marketed must be paid, if at all, from later trust accounting income or from post-contribution gain that can validly be allocated to income.

What happens when the trust flips

Treas. Reg. § 1.664-3(a)(1)(i)(c) permits a CRUT to begin under the net-income method and later convert to the ordinary fixed-percentage unitrust method. The trigger must be a specified date or a single event whose occurrence is not discretionary with, or within the control of, the trustee or another person. The regulations expressly recognize the sale of an unmarketable asset as a permissible trigger.

The conversion occurs at the beginning of the taxable year immediately following the year in which the trigger occurs. After conversion, the trust pays the ordinary fixed-percentage amount. The regulation is explicit about the old deficiency: any makeup amount that has not been paid by the beginning of the conversion year is forfeited by the recipient and added to principal.

This comes up most often with real estate, closely held business interests, and other assets that may take time to sell. If the purpose of the net-income limitation is simply to avoid a required payout before the asset is sold, followed by the ordinary unitrust payout after the sale, a flip NICRUT is usually the cleaner structure. A makeup account that disappears at the flip has little value.

When does a NIMCRUT work?

A NIMCRUT needs two things: a shortfall to carry forward and enough later accounting income to pay it.

1. Will the trust remain a NIMCRUT?

In other words, is there no later flip to the straight unitrust method?

NO → STOP. Makeup will not survive the flip. Any unpaid balance is forfeited and added to principal. Usually consider a flip NICRUT instead.

YES ↓ Continue.

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2. Will there actually be a shortfall?

Will trust accounting income be below the stated unitrust amount for one or more years?

NO → STOP. There is little or nothing to make up. The makeup clause adds little.

YES ↓ Continue.

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3. Can later trust accounting income exceed the current year's unitrust amount?

Not total return. Not liquidity. Accounting income above the current year's unitrust amount.

NO → STOP. Prior shortfalls cannot be paid. The deficiency may continue to grow.

YES ↓ Continue.

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4. Is that excess legally trust accounting income?

Check IRC § 643(b), the governing instrument, applicable state law, and Treas. Reg. § 1.664-3.

NO → STOP. It cannot be used for makeup. Economic income and fiduciary accounting income are not the same thing.

YES ↓ The makeup provision has a realistic path to payment.

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THE NIMCRUT CAN WORK

Current accounting income first satisfies the current year's unitrust amount. Only the excess can reduce the accumulated deficiency.

Three structures side by side

	NICRUT	NIMCRUT	FLIP-NIMCRUT / FLIP-NICRUT
Initial payout	Lesser of accounting income or stated unitrust amount	Same	Net-income method until trigger
Lean-year shortfall	Lost	Recorded as makeup deficiency	If makeup is used before the flip, it is recorded; any unpaid balance is forfeited at conversion
Later payout floor	None	None	Full stated percentage after conversion
Best fit	Net-income limitation is useful; catch-up is not	Trust remains a NIMCRUT and later excess accounting income is realistically expected	Illiquid funding asset followed by desired fixed-percentage payouts

When makeup can be useful

Uneven fiduciary income. Some trusts have uneven accounting income. Rental property, farmland, or operating interests can have low-income years followed by high-income years. If a later year produces accounting income above the current unitrust amount, the excess can pay earlier shortfalls.

A trust that will remain a NIMCRUT. The planner should be able to identify why accounting income is expected to be low at first, why it should be higher later, and why the trust will still be a NIMCRUT when that later income arrives.

Income-timing structures. Some NIMCRUT designs have used partnerships or deferred annuity contracts to separate the timing of federal taxable income from the timing of trust accounting income received by the trust. These structures require particular care. Rev. Proc. 2026-3 places on the IRS no-rule list a § 664(d)(3) arrangement in which the grantor, trustee, beneficiary, or a related or subordinate person can control the timing of the trust's receipt of income from a partnership or deferred annuity contract to exploit the difference between § 643(b) accounting income and federal taxable income. The no-rule position does not mean the structure fails. It means the IRS will not rule on it.

When makeup is unlikely to be paid

The trust is expected to flip after the funding asset sells. The accumulated makeup cannot be paid after conversion. If little accounting income is expected before the sale, there may be little or no opportunity to use the makeup balance before it disappears at conversion.

The post-sale portfolio is designed for total return, not high accounting income. A portfolio may perform perfectly well while producing too little fiduciary accounting income to get above the unitrust threshold. The portfolio can rise in value while the makeup balance also grows.

The hoped-for “income” is really principal. Sale proceeds do not become fiduciary accounting income merely because the trust has liquidity. The contributed-property rule in Treas. Reg. § 1.664-3(a)(1)(i)(b)(3) is especially important here.

The plan depends on an interested person controlling the timing of income. That is precisely the territory in which the IRS currently declines to issue advance rulings for certain NIMCRUT arrangements.

California fiduciary accounting

For a California trust, the state fiduciary-accounting rules also matter. California's Uniform Fiduciary Income and Principal Act replaced the former Principal and Income Act effective January 1, 2024. The current statute addresses what constitutes income, how receipts from dispositions of principal are allocated, and when a fiduciary may adjust between income and principal.

That does not give a trustee a free hand to manufacture NIMCRUT income. The governing instrument, the particular receipt, the trustee's powers, applicable California law, § 643(b), and the special federal CRUT rules all have to line up. If the planning depends on a particular capital-gain allocation or fiduciary adjustment, that issue belongs in the drafting analysis—not in an assumption buried in the projection.

Before using a NIMCRUT

A NIMCRUT is useful only if the accumulated makeup can later be paid.

Before adding the makeup clause, ask:

1. Will the trust still be a NIMCRUT when the expected catch-up income arrives?

2. What specific receipt is expected to create trust accounting income above the current unitrust amount?

3. Why is that receipt income—not principal—under § 643(b), the governing instrument, applicable state law, and Treas. Reg. § 1.664-3?

If the answers are not clear, the makeup balance may never be paid.

For real estate and other illiquid assets that are expected to be sold and reinvested, the more useful comparison is often net-income CRUT or flip CRUT?

Authorities

• IRC §§ 643(b), 664(b), 664(d)(2), 664(d)(3), 664(e).

• Treas. Reg. §§ 1.643(b)-1, 1.664-3(a)(1)(i)(b), 1.664-3(a)(1)(i)(c).

• IRS Publication 6109 (2025), discussion of NICRUTs, NIMCRUTs, and flip unitrusts.

• Rev. Proc. 2005-54 through 2005-59 guidance collected in I.R.B. 2005-34, including sample net-income, makeup, and flip provisions.

• Rev. Proc. 2026-3, § 3.01(39), IRS no-rule position for certain income-timing NIMCRUT arrangements.

• California Probate Code §§ 16321, 16327, 16343.
  

This article provides general information only. It is not legal or tax advice and does not create an attorney-client relationship. Whether a NIMCRUT makeup balance can actually be paid depends on the governing instrument, applicable state law, the trust's assets, the fiduciary powers involved, and the federal tax rules applicable to the particular arrangement. Those issues should be reviewed for the specific trust before a NIMCRUT or flip provision is used.