Albuquerque Charitable Lead Trust Lawyer

A charitable lead trust offers an appealing way to donate for individuals with a high net wealth, along with possible tax reduction advantages.

In a nutshell: these unique trusts pay out distributions at least once annually to a designated public charity or private foundation. Once the payments have been made over the term set by the trust, such as 25 years, the remainder of the trust’s value will be distributed to non-charitable interests.

With this structure, individuals can donate to an organization of their choice over a long period in a tax-advantaged way. Then, they can distribute the remaining assets or cash value held in the trust to themselves, relatives, loved ones, or other beneficiaries.

Setting up a charitable lead trust can be somewhat complex, but it can also pay deep rewards — both financially and philanthropically. Speak to an Albuquerque charitable lead trust lawyer at New Mexico Financial & Family Law to learn more about the best way to structure your trust in order to achieve your intended goals.

You can schedule a consultation and estate plan review with no obligation today when you call our Albuquerque charitable lead trust law firm at (505) 503-1637 or contact us online.

How an Albuquerque Charitable Lead Trust Attorney Can Help

Charitable lead trusts are highly favored by organizations that solicit charitable donations. You can find pages all over the internet created by organizations seeking donations, which explain how these trusts work and how to set one up on their behalf.

Compared to other trusts, such as an AB trust, an Albuquerque charitable lead trust can be less complicated to create. However, there are still important questions to consider.

Before you meet with your Albuquerque charitable lead trust lawyer, try to think about how you might answer the following:

• How much do you intend to set aside for the trust? How much will be donated to the charitable organization? And how much would you like to leave as the remainder on behalf of your beneficiaries?
• What organization (or organizations) did you have in mind to donate to? Do they qualify as a public charity, according to the IRS? Or are they considered to be a private foundation?
• Do you want to arrange a set payment value for each distribution (i.e., create a “charitable lead annuity trust”), or would you rather use a set percentage of the trust’s total value for each distribution (a “charitable lead unitrust”)?
• Are you seeking specific tax advantages? Note that the way you structure your trust can either allow you to deduct from your taxable income for a specific year (with a grantor charitable lead trust), or it can allow you to reduce trust income taxes (using a non-grantor trust). You can also potentially reduce both estate and gift taxes when the remainder is distributed to non-charitable beneficiaries.
• Would you prefer to create the trust now, or as a provision of your will when you pass on? I.e., do you intend to use the trust as a way to distribute money to a charity and your beneficiaries posthumously?
• Do you want to fund the charitable lead trust from another account or other trusts at a later date? For example, you could list the charitable lead trust as a beneficiary for your life insurance policy.
• Do you have other trusts or estate planning tools that could interact with the charitable lead trust? For example, you may have already established (or want to establish) a living trust that is solely intended to bypass probate and distribute to non-charitable beneficiaries.
• What assets do you want to use to fund the trust? Do you plan on retaining the use of an asset that’s held in trust? For example, do you want to continue using a residence that is deeded to the trust?

When you come to New Mexico Financial & Family Law, we can help you consider questions like these, one at a time. We will review your wealth portfolio and your current estate plans and consider them when planning for the charitable lead trust you intend to create.

With this information and your goals in hand, we can help you create the optimal charitable lead trust to leave behind a legacy worth being proud of.

How Does an Albuquerque Charitable Lead Trust Work?

Like other trusts, a charitable lead trust is created by a grantor (also known as a settlor or trustor) when they transfer assets into the ownership of the trust. The trust can be funded immediately, or it can be set up to take ownership of the assets at a later date.

Once the trust is funded, its contents will be managed by a trustee. The trustee is responsible for handling investment decisions of the trust’s contents, such as buying and selling publicly traded equity securities (stocks).

They will also need to maintain any physical property, such as real estate, while it remains the property of the trust.

A grantor can name themself as the trustee of a charitable lead trust. This status can last until they die or are unable to continue managing the trust because of an illness or advanced age.

Charitable Lead Trusts Make Donations to a Charitable Organization (Or Private Foundation) At Least Once Annually

Once the charitable lead trust is created, the trust will then begin paying out distributions to the designated charity or charities on a regular basis. The grantor can arrange for payments to be made at any level of frequency, provided that there is at least one distribution made, annually.

Payments will be made over a set term period. The term can be a set number of years, such as 20, or it can be set to the lifespan of one or more currently living individuals.

You can even combine these, such as by stating that an Albuquerque charitable lead trust should last “70 years, or until the passing of my nephew Alfred A. Example, whichever is the longer of the periods.”

After the term of the trust expires, the trustee will distribute the remainder value of the trust to beneficiaries. If the grantor is still alive, they can be listed as a beneficiary.

Charitable Lead Annuity Trust vs. Unitrust

A charitable lead trust can dictate the amount of each charitable distribution as a set dollar value (e.g., “$15,000”) or as a set percentage of the trust’s total value (e.g., “4.5%”).

With this arrangement, the trust payments can be static and predictable, or they can vary according to the investment income earned by the trust, along with its changing value as it releases funds.

Discuss both options with your Albuquerque trust lawyer to consider the advantages and disadvantages of each.

Charitable Lead Trusts Are Irrevocable

Like many tax-advantaged trusts, a charitable lead trust cannot be changed or dissolved by the grantor once it is created. Making any substantial changes, such as managing the assets in the trust in such a way that the value of the trust becomes $0, would affect the tax benefits provided by the trust.

Because of this arrangement, you should always carefully consider the terms of the trust, especially when it comes to how the trust will be funded, how much will be donated, and how long the trust is expected to last. For example, if the grantor runs into major financial trouble and needs to dissolve the trust early, then they are going to have to repay any tax deductions provided for charitable distributions that will no longer take place.

Testamentary vs. Living Charitable Lead Trusts

A charitable lead trust can be created during your lifetime or, with certain provisions in your will, at the time of your death.

Possible Tax Advantages of a Charitable Lead Trust

There are two main ways to structure a charitable lead trust in Albuquerque:

• Grantor charitable lead trust: This arrangement lists the grantor as the party-of-interest who is responsible for reporting income earned from the trust as their own. If the grantor opts for this type of charitable lead trust, then they can report the funds used to form the trust as a one-time tax-deductible donation up to the yearly charitable limit. For most situations, the yearly limit is 60% of the donor’s annual gross income (AGI).
• Non-grantor charitable lead trust: This arrangement makes the trust solely responsible for reporting and paying taxes on its accumulated interest. This interest can be reduced — up to an unlimited amount, in most cases — by the value of any charitable contributions made by the trust.

A grantor charitable lead trust may be preferable for a donor who wishes to offset their income during a year with particularly high earnings. The grantor must then keep track of all income earned by the trust, such as gains in value for real estate or stocks held in the trust, reporting that income on their yearly tax statements.

A non-grantor charitable lead trust, on the other hand, is solely responsible for its own investment proceeds. Since trusts are taxed at a higher rate than individuals, the grantor should carefully consider the amount they want to donate each year compared to the amount of income the trust is expected to generate.

If the grantor is correct in their estimation, they can feasibly take advantage of the trust’s unlimited deduction for charitable contributions.

One additional advantage to a non-grantor trust is that the remainder value is calculated when the trust is initially formed. This value is based on the estimated future value of the remainder, as calculated by the IRS’ Sec. 7520 rate.

If the trust is created during a period where the Sec. 7520 rate is lower than the expected rate of return for the trust, then the beneficiaries of the remainder could conceivably receive a sizeable distribution at a drastically reduced tax rate.

Alternatively, the grantor can carefully calculate the amount of charitable distributions such that the estimated remainder balance in the trust is zero — AKA a “zeroed out” non-grantor charitable lead trust. If the trust’s investment returns can beat the rate of appreciation, as determined by the Sec. 7520 rate, then any remainder will effectively be distributed to beneficiaries tax-free.

Optimizing Your Strategy for Annuity Amounts and Assets Used to Fund the Albuquerque Charitable Lead Trust

A grantor may prefer to fund a charitable lead trust with assets that are expected to increase greatly in value over the duration of the trust’s term. Examples include undervalued stocks, real property whose estimated value is depressed by current market values, and other equities or debts that have the potential to increase dramatically in value.

One strategy that can be used to maximize potential returns from trust investments is to start with smaller annuity payments that gradually increase over the trust’s lifespan. With this arrangement, the trust’s principal balance has room to grow at a greater rate in its first few years.

The charitable contributions can then increase once the interest has enough “momentum” to be self-sustaining.

With all that said, know that assets — especially highly volatile ones — do not have a guaranteed rate of return, aside from certain bonds and other guaranteed investments. Grantors should consider their appetite for risk and also include instructions to guide the trustee (even if the trustee is themself) so that the trust can maintain its expected value even during periods of economic uncertainty.

Prepare Your Legacy With an Albuquerque Charitable Lead Trust Law Firm

Between its advantageous gifting structure and its potential to reduce estate taxes on distributions paid to your heirs, a charitable lead trust can be the perfect way to establish your future legacy. Coupled with other estate planning mechanisms, including a well-drafted will, your charitable lead trust can provide immense benefits to the people and organizations you care about most.

When you are ready to discuss the future of your legacy, we are here to listen. Reach out to New Mexico Financial & Family Law at any time to schedule a no-obligation estate plan review and discuss your options for charitable trust formation.

Schedule your confidential consultation today when you call our Albuquerque charitable lead trust law firm at (505) 503-1637 or contact us online.