The charitable remainder trust was originally developed as a way to avoid paying taxes on a set amount of liquidated assets. A charitable trust can sell valuable assets without paying a capital gains tax, while the donation amount is also partially tax deductible as a charitable contribution. This can allow the grantor to unlock the investment potential of a highly appreciated asset without losing a large portion of the asset’s value to capital gains tax upon sale.
But these unique irrevocable trusts have other uses as well, including a way to provide for yourself or your loved ones now while ensuring that your charitable intent is honored in the future. In addition, like life insurance trusts, charitable remainder trusts are irrevocable and will be beyond the reach of estate tax, creditor claims, and the probate process when you die. Our attorneys and their staff look at your trust documents from every angle to make sure it is effective before finalizing them.
What is a Charitable Remainder Trust?
The charitable remainder trust produces a monthly income stream, to yourself or others, over a specified period of time or until certain conditions are met. The trust owns financial instruments that generate regular income, which can be paid out on a monthly basis to the named beneficiaries in one of two ways. When the term of the payments has completed or the beneficiaries die, the remaining amount in the trust goes to the charity named as beneficiary at the time the trust was created.
The biggest attraction to the charitable remainder trust is that you don’t have to pay capital gains taxes on the assets liquidated by the charitable remainder trust. Meanwhile, these assets are partially tax deductible as a charitable donation because the actual beneficiary of the trust is a charity.
How Charitable Remainder Trusts Work in New Mexico
There are two different types of charitable remainder trusts, both of which have their usefulness depending on the situation. How the trusts are established is very similar. First, you create the trust and transfer highly appreciated assets to it. The trustee of the trust then liquidates those assets and reinvests the funds into financial instruments that earn steady interest, dividends, or both.
The earnings from these financial accounts are distributed to designated individuals, often the person who set up the charitable trust. You can also name children or their caregivers as the initial beneficiaries to ensure their needs are met. Furthermore, payments can be accumulated and deferred to begin at retirement or another specified event to obtain higher payments at a later date.
How the payment amount is determined is the biggest difference between the two types of charitable remainder trusts.
Charitable Remainder Unitrusts
A charitable remainder unitrust is an irrevocable trust in which the amount of income is based on a percentage of the valuation of the trust, which should happen annually. The variable amount can cause issues with budgeting, but will have the benefit of receiving bigger payments when the financial accounts within the trust increase in value significantly.
Charitable Remainder Annuity Trust
This irrevocable charitable remainder trust pays out a specific amount of money to the named beneficiaries on a monthly basis. The payments will always be made for the same amount on a predetermined schedule. The value of the annuity is based on a fixed value of the initial assets that funded the trust, but it must be at least 5 percent of the value of the trust. This is helpful because you (or your named beneficiary) will have a steady, reliable source of income on a monthly basis until their death, when any remaining assets are liquidated and given to the named charity.
Charitable Remainder Trusts are not an easy legal instrument to navigate, and you shouldn’t do it alone. Contact one of our experienced trust attorneys for more information.