Albuquerque Charitable Remainder Trust Lawyer

Forming a charitable remainder trust provides a tax-advantaged way to donate to a charity while first drawing income from the donated assets.

The creator of a charitable remainder trust (AKA the “grantor” or “settlor”) can use the unique taxation structure of the trust to effectively defer taxes on ordinary income or capital gains. In addition, the grantor may be able to take an income deduction for the year the trust is formed, up to 50% of their annual gross income (AGI),  for the estimated value of the remainder to be donated.

This arrangement can create strong tax-deferment capabilities while still providing measurable benefits to a charitable cause that you care deeply about. Speak to an Albuquerque charitable remainder trust lawyer to go over your options for donating while providing a steady income stream for yourself or other beneficiaries.

Schedule a confidential consultation to discuss trust formation at New Mexico Financial & Family Law with no obligation when you call us at (505) 503-1637 or contact us online.

Questions to Consider With the Help of Your Albuquerque Charitable Remainder Trust Attorney

Charitable remainder trusts require you to make many hefty decisions before they can be fully set up.

These types of trusts typically make the most sense for an individual with assets they expect to generate substantial income or to significantly increase in value. Since the trust is irrevocable, the grantor must also take care to select a charitable organization (or organizations) that is likely to still exist after the trust’s term expires.

Because of these considerations, along with many others, it is critical for someone interested in forming a charitable remainder trust to consider questions like the following:

• How much do you intend to set aside to fund the trust? Will the assets be a mix of cash and appreciable assets, such as stocks, bonds, or real property?
• What charitable organizations do you intend to donate to? Note that contributions from a charitable remainder trust must be made to a qualified tax-exempt organization, as recognized by the IRS.
• How much income do you expect to receive (or provide) from the initial distributions? Conversely, how much of the remainder do you expect to leave to charity (which must be at least 10% of the principal, per IRS rules)?
• Do you want the trust managed by yourself, the charitable organization that receives the remainder distribution, or another third party?
• Do you have specific goals in mind for tax deferment or savings? For example, what is the projected or target value for securities donated to the trust?
• How long do you want the trust to remain active? Would you prefer to set a number of years, or would you rather peg the trust’s duration to the lifespan of one or multiple beneficiaries?
• Do you wish to create the trust in the near future, or do you intend to have it created from your estate as a provision of your will (i.e., a testamentary trust)?
• Are you comfortable with irrevocably transferring interests into the trust, knowing that you can only receive distributions from it and cannot reclaim the assets once they have been signed over?

An Albuquerque charitable remainder trust attorney from New Mexico Financial & Family Law can help you answer these questions and form an optimal strategy for creating, funding, and managing the trust — all with your unique goals and financial portfolio in mind.

The more information you can provide in your initial appointment, the easier and more efficient it will be to strategize for and eventually create your trust. Please try to bring a list of assets you would like to use to fund the trust and a list of organizations (or a single organization) for whom you intend to gift the remainder balance of the trust.

While your intentions may change after your first few discussions with us, having a strong idea in mind can help you receive tailored recommendations and work towards the best possible strategy for achieving your goals.

How Does an Albuquerque Charitable Remainder Trust Work?

A charitable remainder trust receives assets and post-tax cash from the grantor, which is transferred on a carryover basis. The trust itself is considered to be a charitable entity, meaning that any income generated within the trust — eventually transferring to the charitable remainder recipient — is considered tax-free.

Another important concept to understand is that the trust is irrevocable. This status means that the trust cannot be substantially altered once it is started, and the grantor is legally unable to recover any principal assets (outside of regular distributions given to them as income from the trust if they are listed as a beneficiary).

The trust pays out distributions to one or more beneficiaries over its term. The term can be set as a number of years — e.g., 50 — or it can last as long as the lifetime of a specific, currently living individual (or individuals). Once the term expires, the remainder interest in the trust transfers in its entirety to the designated charity (or charities).

Trustee Management

When the grantor places assets into the trust, a trustee becomes responsible for their management. They will be responsible for buying and selling stocks held by the trust, for example, along with making distributions and recording income earned by the trust.

Like a charitable lead trust, the grantor is legally permitted to serve as the trustee of their charitable remainder trust. However, a neutral party must be contracted to conduct a valuation of any closely held real property, stock, or other assets held in the trust for which a fair market value is not readily ascertainable.

Income Distributions

An Albuquerque charitable remainder trust must make distributions to at least one non-charitable beneficiary at least once every 12 months, per IRS rules. The grantor may choose as many non-charitable beneficiaries as they would like, however, and they can arrange the payments to take place on any set schedule, such as monthly or quarterly.

Charitable Remainder Annuity Trust (CRAT) vs. Charitable Remainder Unitrust (CRUT)

A charitable remainder annuity trust pays a set amount every installment, such as $8,000 monthly. This amount may also be allowed to vary, according to the payment schedule, such as by adjusting the payments by increments in anticipation of the expected rate of inflation. However, the amount must be at least 5% of the principal value of the trust, and it cannot exceed 50% of that principal.

A charitable remainder unitrust, on the other hand, pays out distributions as a set percentage of the trust’s current total value. For example, the trust may pay 0.5% of its value in distributions to beneficiaries annually.

Both arrangements have different tax implications, as outlined in the section below.

Firm Requirements for the Remainder Distribution to a Charitable Organization

IRS rules require that “the remainder donated to charity must be at least 10% of the initial net fair market value of all property placed in the trust.”

Because of this requirement, it is the trustee’s responsibility to ensure that any investment decisions do not jeopardize this threshold donation amount.

Should the trust’s balance run in jeopardy of exhausting the 10% threshold, then it is highly possible that the IRS could consider the trust to be in violation of its rules. Subsequently, the grantor and their beneficiaries may be required to repay any deductions made from their taxes on income, capital gains, gifts, and estate transfers.

How Taxes Are Paid on Distributions From a Charitable Remainder Trust

Taxes levied on distributions from a charitable remainder trust follow a unique scheme, compared to most other financial arrangements.

Basically, distributions only invoke taxes on the amount that the trust generated in ordinary income, capital gains, or other interest in the years it was active, albeit on a deferred basis.

The way it works is that each beneficiary pays taxes on the distributions they receive each year, according to the following tiers:

Tier 1: Ordinary Income

All payments made from the Albuquerque charitable remainder trust are first taxed as ordinary income up to the amount of ordinary income generated by the trust that year. If there is a year where distributions do not completely deplete the ordinary income the trust generated during that period, then the remaining amount carries over to the next year.

This arrangement continues until the amount paid in distributions eventually equals the amount of ordinary income generated by the trust.

Tier 2: Capital Gains

Once the value of distributions exceeds the amount of ordinary income generated by the trust (including any carryover amount from prior years), then distributions are taxed as capital gains. Like ordinary income, taxes on distributions are paid as capital gains until the amount distributed equals the amount of capital gains earned by the trust.

Distributions are considered as short-term capital gains first, up to the value of any short-term gains made that year. Taxes are then paid as long-term capital gains once all short-term gains have been accounted for, up to the amount of long-term gains earned that year.

Tier 3: Other Non-Taxable Income

Once capital gains and ordinary income taxes have been fully paid, any excess amount transferred from the trust is considered to be other income exempt from tax, up to the amount of tax-exempt income generated by the trust. Examples of tax-exempt interest and income include gifts, inheritances, and life insurance proceeds.

Tier 4: Return of Principal

If distributions effectively deplete all taxable and non-taxable income generated within the trust, then any excess payments count as withdrawals from the principal. Since the principal value of the trust is funded with post-tax income or unrealized gains, then this amount is tax-free.

However, grantors should be careful to not withdraw in excess of the amount they had exempted from their income the year the trust was formed. Otherwise, they are essentially “taking back the gift,” and could be subject to a reinstatement of income tax liabilities.

Since these tiers are arranged as such, it may be possible for someone to defer taxes on ordinary income or capital gains from sold assets for years at a time — or indefinitely, if the trust is able to generate enough excess income each year to pay for the distributions, and then some. The amount deferred or saved depends on the value of distributions compared to the taxable income generated by the trust each year. In other words, lower distributions are likely to result in higher levels of deferment and savings.

Unrelated Business Taxable Income

Grantors should be cautious about including income-generating businesses in the trust if the business’s operations are not directly related to the activities of the charity they intend to donate to. In fact, the unrelated business taxable income (UBTI) could be subjected to a 100% excise tax, effectively diverting all profits to the IRS instead of the trust.

For example, if a grantor’s rental property is placed into the ownership of the charitable remainder trust, and the property earns profits in a manner unrelated to the charitable beneficiary’s cause, then these proceeds could be taxed as ordinary business income. In addition, the income could be subjected to an excise tax of up to 100% of the UBTI’s value.

While the charitable remainder trust in Albuquerque would not lose its tax-exempt status entirely, it would still have to account for these proceeds separately and pay hefty taxes on them. For this reason, grantors should be cautious about the types of business interests they transfer into the trust.

What Happens When a Beneficiary Dies Before Their Interest Is Entirely Distributed?

If a beneficiary dies, any remaining non-charitable interest designated for them is split pro-rate to any remaining surviving beneficiaries. If all beneficiaries pass, then the entire value of the trust is reserved as the remainder amount that goes to a charitable cause.

Get Started Planning for Your Legacy With an Albuquerque Charitable Remainder Trust Law Firm

New Mexico Financial & Family Law wants to help you gift to a charitable cause of your choice in the best possible way, with respect for your goals and your unique financial portfolio. Schedule a no-obligation appointment with one of our Albuquerque trust lawyers today.

They’ll discuss your options and help arrive at the perfect solution for your giving and tax-saving goals.

Schedule your confidential consultation when you call us at (505) 503-1637 or contact us online.