Pooled Income Funds provide donors with an immediate partial tax deduction and a lifetime of income.
If you’re like most people with a life-long history of charitable giving, you’ve more than likely thought of how best to continue giving upon death. The trick is how to do so while reducing the value of your estate. Although there are several techniques for donating assets upon death, leveraging a Pooled Income Fund (PIF) can be one of the most effective.
So, what is a PIF?
A mutual fund comprised of assets that are pooled and invested together as gifts allowing for several different types of acceptable contributions. As a donor, you would be responsible for choosing which 501(C)3 entity receives the payments. Any income generated through the fund is distributed to each participant and beneficiary based on their respective share of the fund as allocated when the fund was established. The fund adheres to three main objectives; ensuring an endless stream of income, reducing taxes and making a future contribution to charity – an endlessly worthwhile and beneficial vehicle to place assets into.
How does the fund work?
The fund collects charitable assets contributed by a donor and in turn invests those assets to create a steady stream of future income for the beneficiaries upon the donor’s death. At the time of contribution, the asset value of the trust is unable to be determined due to fluctuations that may be occurring in the market at that time. Because the fund decreases the realized assets of the donor, it helps to reduce the aggregate value of the donor’s estate. Subsequently, assets in a PIF avoid probate completely because the donor makes it clear as to where the remaining balance will go upon death. This action also qualifies the donor for an instant income-tax deduction.
Allowable Pooled Income Fund contributions include;
- Mutual Funds
- Tangible Assets, i.e., machinery, vehicles, buildings, land, etc.
Why have a PIF?
There are several opportunities that arise from investing in a PIF. Aside from tax advantages, other benefits include; greater income potential, creating a philanthropic tradition for the donor’s family, low costs and little worry about who will take care of record keeping and wealth replacement. As with any other aspect of estate planning, it is important to always consult an advisor to make certain that use of a PIF is best for your given situation.
Establishing the fund
To set up an account the donor must complete the PIF form provided as a courtesy through the U.S. Charitable Gift Trust. Upon completion, donor assets are transferred over to the U.S. Charitable Gift Trust. If securities are among the transferred assets, it is the responsibility of the donor to make sure that the asset holding entity transfers those assets – a process that typically takes a few days for shares to sell, and once sold the net proceeds are invested into the chosen investment fund of the donor.
The difference between a PIF and a Charitable Remainder Trust (CRT)?
There are notable similarities and differences between PIFs and CRTs. The biggest similarities between the two are that a Donor Advised Fund may be named as the beneficiary of the remainder account, and the advisors may direct gifts to charities while capital gains taxes are avoided or deferred. While each vehicle has virtually the same result, there are a substantial amount of differences between the two. Differences such as; a PIF can be established immediately while a CRT typically takes much longer. The minimum value required to establish a PIF is $20,000 while its $100,000 or more for a CRT. The payout is different as well depending on investment returns. Despite noted similarities, the PIF is suited better for the donor who doesn’t have a sufficient amount of assets for a CRT.
Pooled Income Fund. (n.d.). Retrieved from Investopedia: https://www.investopedia.com/terms/p/pooledfund.asp
Pooled Income Funds, Charitable Remainder Trusts, and Gift Annuities Key Differences. (2018). Retrieved from The U.S. Charitable Gift Trust: https://www.uscharitablegifttrust.org/includes/loadDocument.php?fn=4366.pdf
The U.S. Charitable Gift Trust. (n.d.). Retrieved from How the Pooled Income Fund Works: https://uscharitablegifttrust.org/how-to-set-up-a-pooled-income-fund-account.php