Key Takeaways
- A pooled income fund is a type of charitable trust that pools and invests gifts to generate income.
- Income generated from the fund is distributed to donors’ chosen recipients for life, usually paid quarterly.
- After the donor’s death, the remaining fund assets are transferred to designated beneficiaries.
Pooled Income Fund Explained
A pooled income fund is a charitable trust that combines donations from many contributors into one shared investment fund. It is designed to provide income to donors and beneficiaries, with payments based on the size of each donor’s contribution. Donors can name someone, usually themselves or a family member, to get income from the fund for life. Any remaining assets are transferred to the chosen charity after the donor’s death.
How to Understand Pooled Income Funds
A pooled income fund is a type of charitable trust that gets its name from the fact that contributors’ resources are pooled for investing purposes. There is no collaboration among donors. The funds are not distributed to charity until after the donor is deceased.
A pooled income fund differs from a giving circle because it allows the designated beneficiaries to receive regular income distributions for life. The amount of income received varies and depends on the performance of the investments held by the trust. The fund takes into account IRS life expectancy tables and the fair market value of the assets at the time of the transfer to determine income distribution amounts.
A pooled income fund allows you to do three things: ensure a perpetual income, claim a current tax deduction, and make a future gift to charity.
For example, say you own stock with a value of $50,000. Then you donate the stock to the pooled income fund to eventually fund scholarships for underprivileged students and reserve for yourself an income interest for life. In the transfer of stock to the fund, you do not recognize a capital gain on the appreciated value since the original purchase, so you avoid the capital gains tax. You will also receive a charitable deduction for the year you enter the pool, lowering your taxes.
Key Considerations for Pooled Income Funds
What Are Acceptable Contributions to a Pooled Income Fund?
Generally, you can contribute any liquid asset to a pooled income fund. Commonly used assets include:
Some pooled income funds may also permit donations of other types of assets. These less common current assets include:
- Certain restricted securities or privately held stocks
- Noncash assets such as life insurance
- Tangible property such as fine art, automobiles, or real estate
- Tax-exempt securities
- Bitcoin
Tax Advantages of Pooled Income Funds
Assets contributed to the fund qualify for an immediate income-tax deduction. The amount of the deduction depends on the gift’s fair market value, the beneficiary or beneficiaries’ age, and the fund’s rate of return.
Assets contributed to a pooled income fund are also removed from the value of the estate, which could help limit the effect of applicable federal estate taxes. This also means that assets in a pooled income fund avoid probate. Donors will know precisely where the fund’s remaining balance goes—to a select charity or set of charities.
