Charitable trusts are often appealing to donors who wish to give significant sums to charity. These kinds of trusts afford tax benefits for donors and allow donors to retain certain benefits for themselves or their family members. For small donations, however, charitable trusts are not typically feasible: they involve setup and administration costs in the thousands of dollars. Charities can set up pooled income funds (among other arrangements) to provide similar tax and retained benefits for donors making smaller contributions.
A pooled income fund is a sort of shared charitable trust. It is set up and maintained by a public charity. It does not involve setup costs for the donor. Once established, pooled income funds operate basically as follows:
- A donor contributes a sum of money or property other than tax-exempt securities, subject to any minimum contributions or other limitations imposed by the charity, to the fund.
- The donor chooses a beneficiary or beneficiaries to receive income distributions from the fund for the beneficiary’s lifetime. The donor can be the beneficiary.
- The donor gets a tax deduction for the present value of the portion of the contribution that is going to the charity (i.e., the remainder interest). A donor who gives appreciated property can avoid paying capital gains tax, which is one of the most appealing aspects of pooled income funds for donors.
- The trustees of the fund add the donor’s contribution to the contributions of the other donors. The trustees invest all of the funds together. Often, a charity will sell and reinvest the non-cash assets the donor contributed.
- The trustees make the required income distributions to the beneficiaries, which is the beneficiary’s proportion of the income of the entire fund (i.e., the “pooled income”).
- The donor can make additional contributions to the fund, subject to any additional limitations imposed by the charity.
- At the death(s) of the beneficiary or beneficiaries, the trustees pay the remaining funds to the charity.
For the charity, the appeal of establishing a pooled income fund is in making smaller donations appealing to and feasible for donors. The donor who has appreciated assets but wants to retain income, as well as the donor who wants the benefits of a charitable remainder trust without the up-front costs, may find pooled income funds particularly appealing. Also, donors may find that a pooled income fund that is less than 3 years old can provide them with a larger charitable deduction than can an older fund, because of the way the tax code and regulations require the remainder value to be calculated.
Like any legal arrangement, pooled income funds are not appropriate for all public charities. Pooled income funds require maintenance, may compete with other giving vehicles that charity offers, and may not draw donors at the rate the charity hopes. For the right public charity, a pooled income fund can be a valuable source of funds and donors.
If you would like to discuss whether a pooled income fund might be right for your organization, please feel free to contact our office.