There are many people who would like to provide financial support to their favorite charity but have concerns about their lack of liquidity. Although cash can be one form of contribution made to a non-profit organization, sometimes there are ways for individuals with assets that have appreciated substantially to make charitable contributions without tapping monthly income payments needed to pay for living expenses.
Our attorneys who provide estate planning guidance to those throughout Bernalillo County and the surrounding areas of New Mexico understand the challenges of making charitable donations when an individual’s capital is tied up in assets. We have provided an overview of the two types of charitable remainder trusts that may provide a viable option in such situations – (1) Charitable Annuity Remainder Trust (CRAT) and (2) Charitable Remainder Unitrust (CRUT). These types of trusts permit a donor with assets that have significantly appreciated in value to continue to receive the income from the trusts to provide for their financial needs while donating the remaining value of the assets to the charity. This can be an appealing option for those with funds invested in real property or securities.
Because this special type of trust must be non-revocable, those considering this approach should discuss the option with an experienced estate planning attorney because the settlor must permanently surrender the assets. The trust may be set up for a term up to a maximum of twenty years with the settlor maintaining the right to receive income payments from the trust throughout the duration of the living trust. This form of trust also provides a means for securing an income stream for surviving family members and loved ones because other beneficiaries may receive these payments after you pass away. While the trust receives the remaining value of the assets, this value must be at least ten percent of the net fair value of the principle assets at the time the assets are transferred into the trust.
Both forms of charitable remainder trusts – CRATs and CRUTs – permit the donor to receive an income tax deduction upon creation and funding of the trust. The value of the federal income tax deduction amounts to the present value of the remainder the charity will receive after all income distributions have been made to the settlor and his or her beneficiaries.
Each of these two forms of charitable remainder trusts offer slightly different benefits. When a CRAT is used, the settlor receives a fixed percentage during the life of the settlor and the trust. The level of the income distributions are fixed regardless of the actual appreciation of the trust assets. The annual income payments must be at least five percent of the net fair market value of the assets at the time of the creation of the trust. This means that a CRAT is a fairly secure financial planning vehicle that provides predictability in terms of the amount of the income payments, but it does not permit the donor to benefit from appreciation in the value of the assets after the assets are placed in the trust.
A CRUT differs because it permits the donor to benefit from future returns on investment generated by the trust assets after the trust is established. While the donor still receives a fixed percentage of the net fair market value of the assets, the fair market value is calculated on an annual basis. This means that the donor can benefit from making good investments, but also can experience lower income payments if the value of the assets depreciate after the trust is funded.
The above information is designed solely to illustrate general principles of law, and does not constitute a specific legal opinion on individual cases. We suggest that you contact experienced legal counsel for a specific opinion tailored to your individual circumstances.
If you have questions about charitable contributions, our New Mexico Attorneys at Life Leaf Legal Group, PC offer a free consultation in our centrally located offices in Santa Fe and Albuquerque so that we can discuss your specific situation. Call us today to schedule your free consultation at (505) 856-3591 to learn about your rights and options.