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· Administration Options
· Q&A
Pooled Income Funds
Pooled Income Funds are trusts that allow for the pooling of contributions from several donors to benefit both the charity and the individuals concerned. A Pooled Income Fund is a flexible charitable giving vehicle that helps a donor set aside money for charity, while generating a lifetime income stream for as many as two beneficiaries. A pooled income fund is often referred to as the "mutual fund of life income gifts."
Pooled income funds were once offered by the traditional charitable organization but have recently become available through large financial institutions. As a donor it is important to understand the underlying structure and stability of the pooled income fund you invest your charitable dollars. Many times a pooled income fund can have multiple investment pools and it is important that your need for income matches the risks of the appropriated investment pool.
The typical donor:
- Needs variable income for life.
- Seeks income that is market sensitive.
- May participate in different pooled income accounts for varied needs.
- Is between the ages of 55 and 80.
Donor Advantages of utilizing a Pooled Income Fund for making Charitable Gifts:
- Donor can make gifts of cash or appreciated assets
- Receive monthly income for life, joint lives or for the lives of income beneficiaries
- Diversify concentrated holdings to potentially produce more income and give more to charity
- Reduce income taxes immediately
- Reduce estate taxes
- Eliminate capital gains tax
- Reinvestment of assets transferred to the trust
- Professional management of the fund
Making a Gift Using a Pooled Income Fund
The Charity or designated Trust Company has created and manages several pooled income funds. After cash or marketable securities are transferred these assets are pooled, reinvested, and managed with other donors' assets to leverage investment performance. A percentage share of the income earned in the fund is paid to you or the income beneficiaries you choose. When the income beneficiaries die, the remaining assets in your portion of that fund are transferred to Charity.
Flow Chart From Donor's View
- Donor makes Gift of cash or appreciated Assets to Pooled Income Fund
- The Pooled Income Fund liquidates any securities
- Donor receives the trustee's calculation of the federal income tax deduction
- Donor, or designated income beneficiary(ies), receive income for life.
- At death of income beneficiary remainder goes to Gift Trust (Charity).
The income tax deduction you receive when giving through a pooled income fund is based on an Internal Revenue Service formula that considers your age, the ages of other income beneficiaries, the projected assumed payout of the fund, and a federal index rate. The older you are at the time you make a pooled income fund gift, the larger your income tax deduction based on the amount of gift transferred. The trust provisions you have control of when giving through a pooled income fund include:
- Naming the income beneficiaries.
- Choosing the charitable remainder beneficiaries.
- Selecting the frequency of income payments.
Different Ways for Charities to Administer Pooled Income Funds:
- The charity can be the trustee.
- The charity can employ a bank as trustee, but the charity maintains control.
- Organization may be an affiliate whose funds are controlled by the umbrella organization.
A Pooled Income Fund is unique, with all kinds of special rules and regulations. It is not a simple endowment fund. The average business office of a charitable institution should not try to administer the pooled income fund by itself. The pitfalls are legion and normally, that is asking for trouble. Key to this decision is to realize that is your Fund is found to be invalid by the IRS at some later date, all past gifts to the Fund are invalid and tax deductions claimed by those donors are invalid as well. Imagine the negative public relations to your organization that will result by having to tell all past donors to refile their tax return for the year(s) of their gift(s), removing their tax deduction, and paying back interest and penalties. Since the chances are remote that you will be able to correct the error in the Fund retroactively, the risk is not worth taking. The charity should get away from the day-to-day administrative paperwork and concentrate on donor relations and contact.
The charity can employs a bank as trustee or if it wants to be the legal trustee, employ the bank as custodian of the assets and administrator of the Fund where as the Charity still maintains control of the Fund. Use a bank for what it does best, handling tax returns, collecting, computing and distributing income, and the like. Do not become the bank's first Pooled Income Fund client. Seek out banks with proven long-term track records. While the experience of a third party trustee is important, remember that such experience is usually, (but not always) only as good as the current staff of that trustee. Do your due diligence in this area.
Your organization may be related to or part of a national organization, like a church denomination or group of colleges or secondary schools, etc. that could use the pooled income fund of the umbrella organization. Be careful here, for the issue of control of your charity by the umbrella organization is important. Have your legal counsel give an opinion here. Technically, the organization that controls the Fund must control the remainderman, the organization that benefits from the gift. Again, be conservative in such decisions. You do not want to find out that you are part of an invalid pooled income fund because one or more charitable beneficiaries do not qualify as appropriate remaindermen. There is very limited case law on this issue, but there is a difference between a remainderman that is related to the organization controlling the fund and one that is controlled by it.
Some of the tests on related vs. controlled revolve around whether or not your organization's board is approved by the organization controlling the Fund and what happens to the assets of your charity if you close the doors. If the assets revert to the organization running the Fund, this is one proof that your organization is controlled by the one running the pooled income fund. Again, have legal counsel review this issue, in light of the regulations.
Starting a Fund
Despite what some bank trustees suggest, start your fund with two gifts on the same day. A pooled income fund is a fund that commingles gifts from multiple donors. It could be separate participations from a married couple, as long as each makes a separate gift, receiving income on their gift first and each naming the spouse as second income beneficiary.
Or, get a supporter of your organizations to agree to make a gift on the same day you find your first donor. Have that supporter give you an undated check or promise to mail their gift on the same day you obtain the first one. In any event, get two gifts on the same day to initially fund your pooled income fund. Don't listen to banks that tell you to ignore this point. What happens if you close your trust year and you only have the first gift? Do you have a bonafide pooled income fund? Raising such questions is just asking for an IRS audit. I would not want that question to come up in the minds of the IRS. You don't want them to tell you that you have an invalid fund and that all past donors had made gifts that did not qualify for a tax deduction.
Become familiar with the rules and make sure your organization and your Fund's trustee follow them. For Instance:
- Valuation Date Problems
- Terminating Income Interests
- Types of Gifts to a Pooled Income Fund
- Earnings Record vs. Fund Yield
- Your Offerings Brochure
- Commingling of Assets
- Investing your Pooled Income Fund
- Your Board Member as a Donor
- Gifts of Real Property
- Corporate Donors to a Pooled Income Fund
- Real Property Investing
Both the charity and third party trustee (i.e.: bank or trust company) alike should understand what is possible and what is not possible in the proper trusteeship of a Pooled Income Fund.
Questions & Answers
Q. How would my life income interest be determined and how frequently would this income be paid? A donor's life income gift is represented by participating units in the Fund, similar to a mutual fund arrangement. The amount of income is determined by the rate of return earned by the entire Fund for that year. Payment of income are normally made quarterly.
Q. Is it possible for the Life income Agreement to provide income for both myself and another, for as long as we live? Yes. This is called a Two-Life Income Agreement.
Q. What type of assets are usually contributed by donors to your Pooled Income Fund? Normally, long-term appreciated securities or cash. The tax laws do not permit the acceptance or our investment in tax-exempt securities, real estate or depreciable assets.
Q. Would there be any special advantages to me if I were to fund the Life Income Agreement with long-term appreciated securities? Yes. The value of your charitable remainder gift would be based on the fair market value of the securities contributed, not your cost basis. In addition, there would be no capital gains implications to you when appreciated securities are transferred to our Fund or later sold. A pooled Income Fund also pays no capital gains taxes on sales of securities if your holding period was longer than one year. Under the tax laws, the Fund takes over your holding period. Thus, if your holding period for the securities that you contribute to the Fund was more than one year, there will be no capital gains tax on a sale made by the Fund. Even if you should contemplate a Two-Life Income Agreement, there will be no capital gains tax involved on the transfer of appreciated securities.
Q. Are there minimum or maximum amounts that can be contribute under your life income arrangements? There is normally a minimum initial contribution that varies based on fund. There is usually a lower minimum for additional contributions, and there is no maximum for initial or additional contributions.
Q. Can I become a participant in the Pooled Income Fund at any time during the year? Yes, there are no restrictions on when you can come into the Pooled Income Fund.
Q. Are there income tax advantages to me if I invest in a Life Income Agreement? Very definitely. You will be entitled to an immediate charitable contribution deduction in the year of your gift on your personal tax return. The amount of your charitable deduction is determined by federal government tables. Your charitable gift would be reduced by the present value of your life income interest. The actual deduction will be dependent on the age of the designated beneficiaries and the size of your contribution. The charitable deduction will be smaller in the event you desire a Two-Life Income Agreement, since it then would be dependent on the age of both beneficiaries.
Q. How much am I allowed as a present income tax charitable deduction on a contribution, and can I carry over any excess contribution on subsequent income tax returns? Generally if your gift to a Fund is in money, you would be allowed to take a charitable deduction of up to 50 percent of your adjusted gross income. If your charitable gift is over the permissible annual contribution deduction, you are allowed to carry the excess over into the next five (5) succeeding tax years - thus, six years in all. If your gift, on the other hand, is of long-term appreciated securities, you are entitled to a 30 percent deduction on your adjusted gross income, again with a five-year carryover of any excess charitable contribution.
Q. How can I compute what my specific deduction will be? If you will furnish us with your date of birth, or, if there are to be two income beneficiaries, both dates of birth, and the approximate amount of your anticipated contribution, we shall be happy to furnish you and your advisors with the amount of the charitable deduction based on the information supplied.
Q. What is my situation as to federal estate taxes should I become a participant in your Life Income Agreement?
Should the Life Income Agreement be based on your life income alone, the total value of your interest in our Pooled Income Fund would effectively be removed from your taxable estate. However, if your Life Income Agreement involves your life and that of a non-spouse survivor's life interest would be subject to federal estate tax based on the survivor's age at your death. Should the other beneficiary be your spouse or not survive you, no part of your interest in our Pooled Income Fund would be subject to tax in your estate under present law.
Q. Besides favorable tax benefits to me, what are some of the other advantages of a Pooled Income Fund gift?
- The personal satisfaction of making a substantial contribution to your favorite philanthropy during your lifetime.
- The securities are lodged for safekeeping with a large financial institution.
- Greater diversification of assets than if you yourself established a separate charitable remainder annuity trust or unitrust.
- The opportunity to convert low-yield securities to a higher-yield common diversified fund at low or possibly no tax cost.
- Permitting the direct distribution of Fund property at death, thus reducing probate expenses and delays.
Q. Will I receive a written statement from the PIF informing me of the amount of income that I should report on my federal income tax return? Yes, a statement will be furnished to you shortly after the end of each calendar year.
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