If you are passionate about giving and want to combine regular donations with some tempting tax advantages, a charitable lead trust can you achieve some of your loftiest philanthropic goals. Also, once the established payment arrangement is completed, the remainder of the trust’s value can be transferred back to you or non-charitable beneficiaries, such as your children.
Charitable lead trusts do not provide the same level of potential tax reductions as charitable remainder trusts, however. The creator of the trust is expected to pay taxes on income (all net proceeds) earned by the trust, as well.
These taxes can be offset by the amount donated, but it is still a consideration compared to a remainder trust.
On the other hand, charitable lead trusts are preferable for charitable organizations, as they establish a pre-set amount of funds to donate (or, a pre-set percentage of the trust’s value) throughout the lifetime of the trust.
Overall, both types of charitable trusts offer significant potential advantages and tax savings — not to mention a much-appreciated source of income for charitable foundations.
Explore your options for giving while offsetting the costs borne by your eventual beneficiaries when you speak with an estate planning lawyer at New Mexico Financial & Family Law today. We are ready to schedule your no-obligation consultation at any time when you call us at 505-503-1637 or contact us online.
Charitable lead trusts are not simple to set up, and once they are active, they are irrevocable, meaning they cannot be changed in any way by the creator (the “grantor”). In addition, they are designed to be self-sustaining for many years at a time — often decades.
Because of these considerations, it is vital to not only plan ahead financially for the long-term viability of the trust but also to look to a New Mexico attorney team capable of helping you create an arrangement both you and your beneficiaries will be happy with for years to come.
Important considerations to weigh when creating a trust include:
New Mexico Financial & Family Law is highly experienced with estate planning matters, including the creation of charitable trusts.
We listen carefully to your goals, intentions, and most pressing concerns before responding with questions that can help us all get on the right track. Then, we will recommend a comprehensive strategy for meeting all of your financial goals — for this life and the next.
Reach out to us for experienced guidance and compassionate counsel on all aspects of your estate plan. We have established a reputation for quality client service and deep legal knowledge, so come to us to see why so many people give us their personal trust and confidence when establishing a charitable trust.
The basics of a charitable lead trust are as follows:
While this arrangement may seem straightforward, there are many considerations that must be weighed in order for the trust to be formed and enacted in a way that achieves the goals of its creator.
There are two main types of charitable lead trusts: grantor and non-grantor.
Grantor trusts are generally preferred by individuals expecting a large one-time windfall in income in a given year, followed by a period of lower income (and, therefore, a lower tax burden) in subsequent years.
Non-grantor trusts are preferred by individuals seeking to reduce the costs of estate or gift taxes paid by their future beneficiaries.
In some trusts, the remaining value of assets can be transferred, in part or in whole, back to the grantor. This arrangement is known as a “reversionary” structure. It negates some of the tax offset benefits that can be obtained if the beneficiary (or beneficiaries) of the trust’s remaining value are not the grantor.
An annuity charitable lead trust makes pre-set donation amounts according to the designated schedule of payments. These payments can be set to change over the years, as well, such as growing by $1,000 each year or by an estimated rate of inflation.
Alternatively, the trust can be arranged so that a set amount of its total value is paid out every year. This arrangement can ensure that the trust remains financially solvent throughout its lifespan, but it can also make the final value of payments much less predictable, creating uncertainty for the recipient organization while making it harder to calculate the true value of deductions in advance.
The choice of supporting a publicly funded charity, as opposed to a private institution, can have further tax ramifications for the donor.
The IRS makes the following distinction between the two:
Under the tax law, a section 501(c)(3) organization is presumed to be a private foundation unless it requests and qualifies for a ruling or determination as a public charity. Organizations that qualify for public charity status include churches, schools, hospitals, medical research organizations, publicly-supported organizations (i.e., organizations that receive a specified portion of their total support from public sources), and certain supporting organizations.
A charitable lead trust can provide regular payments for any specified period. Unlike charitable remainder trusts, there is no maximum number of years the trust can remain active.
The minimum number of payments is once annually, but there is no maximum.
The grantor can decide for the trust to run a set number of years, for the duration of their remaining life, or both. In the latter case, they can decide whether the trust will terminate after the duration that is greater or the one that is lesser.
For example, they can decide that the trust will make regular charitable contributions for 20 years or until the end of their life, whichever is greater.
Typically, most charitable lead trusts consist predominantly of cash. Not only is cash liquid, but it is easier to anticipate its value over the duration of the trust’s term.
A grantor can, technically, decide to put anything in the trust, though, including:
Note that including any of the above assets can make it more difficult to predict the income of the trust and make it more challenging to ensure that cash is available for the regularly scheduled donations. In some cases, the items held in the trust may need to be liquidated in order to ensure the trust has a high enough balance to donate to charities, as planned.
Charitable lead trusts can create one major challenge: they cannot be changed, once created. Because of this, it may be possible that the designated charity become less favored by the grantor — or maybe even falls out of existence.
Further, the grantor may realize that they wished they could have funded another charity in addition to the one (or ones) they’ve already designated.
One option to avoid the above challenges is to designate a donor-managed fund as the recipient of charitable donations. This option is only provided by certain financial institutions, who will provide a list of possible charitable organizations to support through the trust.
Donation amounts and the organization that can receive it can be changed multiple times, often at the sole discretion of the original donor.
A charitable remainder trust follows the opposite pattern from a charitable lead trust: after the trust is established, it pays out an annuity (or a percentage of the trust’s value) on a regular schedule to the named non-charity beneficiaries — which can include the creator of the trust and their spouse.
After a set period of years (a maximum of 20), the remainder of the trust’s assets are donated in their entirety to the charitable institution(s) of choice.
Another distinguishing characteristic of charitable remainder trusts is that any assets deposited within them can reduce and otherwise defer capital gains taxes on their growth. For this reason, charitable remainder trusts often have many appreciating assets contained within them, especially securities and real property.
Yet one more important distinction is that a charitable remainder trust can be altered in many ways, up to the point its remaining assets are distributed to a charitable cause. While the trust is, technically, irrevocable, adjustments can still be made, such as the choice in charitable institutions to which the assets will ultimately be donated.
The choice of a charitable lead trust versus a charitable remainder trust depends on the goals of the grantor, including what taxes they seek to avoid, whether they are concerned about the costs of appreciating capital gains, and whether they could benefit from a reliable source of income derived from their assets, albeit at a loss of control and technical ownership of said assets.
As you can see, creating a charitable lead trust is quite a commitment, with many different considerations to weigh before even a single word is written down. The right trust will ensure that both the cause and the people you love will be taken care of while helping you plan for your financial future with the highest possible level of confidence.
New Mexico Financial & Family Law is here and ready to help you come to the final decision as to the best arrangement for your financial future. We share your passion and commitment for supporting causes you feel strongly about, which is why we always go above and beyond to thoroughly serve our clients.
If you are interested in starting a charitable trust in order to defer or avoid taxes while providing your beneficiaries with the fruits of your life’s hard work, we have experienced estate planning attorneys in New Mexico waiting to assist you. Call us today at 505-503-1637 or contact us online to schedule a no-obligation case review and discuss your goals for your financial future.
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