Philanthropic individuals have a broad and perhaps bewildering array of products and techniques available to express their intentions. Their gifts can be made in a bequest in a will or trust, donation to a private foundation, to a donor-advised fund, or through a charitable lead trust, just to name a few.
Each gift has particular advantages and disadvantages. One tool that has gotten less attention than other charitable vehicles is the pooled income fund. Its unique benefits merit a closer look.
A Comparison of CRTs and Pooled Income Funds
The Charitable Remainder Trust (CRT) and the pooled income fund are conceptually quite similar. In each, an individual gives property to a trust while retaining an income interest. Upon the conclusion of the income interest, the balance of the trust property passes to a charity.
The income interest is valued according to rules and regulations established by the Internal Revenue Service. The value of that interest is subtracted from the value of the assets transferred to the trust and that is the “remainder” that passes to the charity.
The central advantages of both the CRT and the pooled income fund are: 1) the individual making the gift (the grantor) is entitled to an income tax deduction in the year assets are transferred to the pooled income fund or CRT; 2) the grantor can retain an income interest for life or the grantor can give a life income interest to another individual or individuals; 3) the remainder interest passing to the charity typically qualifies as a deduction for federal gift tax purposes and is not included in the grantors taxable estate; and 4) no tax is incurred on the transfer of appreciated assets to a charitable remainder trust or to a pooled income fund.
Although CRTs are quite similar, important differences exist (see chart). The biggest difference and the advantage of pooled income funds over the CRTs, is the cost of establishment and administration. When an individual creates a CRT the person must hire an attorney or other professional to draft the trust. The terms of the trust are not necessarily complex, however the trust must be prepared properly to conform with the IRSs requirements to ensure the tax benefits. In addition, the CRT has significant ongoing filing and record keeping requirements.
This is in contrast to a pooled income fund. Usually no fees or expenses are incurred upon the contribution to a pooled income fund. And, because these funds are almost always organized and run by charities, the ongoing administration expenses are not the burden of the grantor.
So, exactly what is a pooled income fund? Generally speaking, it is a fund maintained by a charitable institution. In fact, this is a requirement of a pooled income fund, although the actual administration can be delegated to an extent by a charity.
The fund commingles contributions from all donors and distributes the income to the income beneficiaries. This commingling or “pooling” gives the funds their name. A donor can retain an income interest on her own behalf or can create an income interest for the life of any other individual or individuals she chooses.
The creation of a life income interest in another person is, of course, a gift for federal gift tax purposes, although another deduction may be available (e.g. the marital deduction for gifts to a spouse). The income interest can be for several lives and can be concurrent for consecutive interests.
For example, a donor can reserve a life income interest and upon his death, the life income interest can pass to a child. A key feature of these funds is that the interest retained must be an income interest for the life of an individual or individuals.