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Anchor or Asset?

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How many of your clients have an asset in their portfolio that has significant value, yet it cannot be sold and acts more like an anchor around your client’s neck? This asset may be highly appreciated real estate that comes with underlying annual cash liabilities, such as property taxes, mortgage costs, and annual repair and maintenance expenses. Worst of all, most real estate requires hands-on management. As their advisor, doesn’t your job require you to spend time sorting out all the liquidation options and their ramifications and recommending a suitable conversion strategy? Should your client keep the asset, sell it and pay the tax, do a 1031 Exchange, or gift it out of their estate? What is the resulting effect on the balance of their portfolio? And, how do you get paid for your efforts?

A pooled income fund (PIF) may provide a simple solution for both of you. Often referred to as a “Pre-Built CRT,” many of your clients’ issues are handled by the PIF’s structure. Think of a pooled income fund as a turnkey equivalent to a Charitable Remainder Trust (CRT). By “turnkey” I mean a PIF doesn’t come with many of the restrictions, expenses, and hassles of a CRT. There is no need to create a separate Trust, administer the Trust and worry about complying with the annual accounting and distribution rules of CRTs.

Not all pooled income funds (PIF) are alike. Some do not accept assets such as real estate or tradable securities, but the ones that do, make it easy and affordable to turn difficult assets into income, provide a tax deduction, and a built-in method for passing income on to heirs while allowing them to support deserving charities.

The benefit to the financial advisor is also multi-layered. Yes, because PIFs are considered securities, some are distributed by broker/dealers and an advisor can earn a sales commission for providing this kind of unique solution; but, this tool really ups your advice game. Imagine discussing and counseling your clients about their other assets which had previously been hands-off to you. It also answers a pair of today’s most difficult marketing questions: How does an advisor stand out in a sea of sameness? And, how do you differentiate yourself while everyone else is doing damage control?

Don’t confuse PIFs with donor advised funds (DAFs) which are basically bookkeeping entries to a charitable foundation and do not give the donor income and most don’t allow the contribution of real estate. The IRC Section 642(c)(5) defines a pooled income fund as a split-interest trust established and maintained by a public charity, to which donors can make irrevocable contributions and from which they will receive distributions of income.


Keep the Income, Lose the Hassle

“I have talked to a number of advisors who tell me stories of clients owning a property that provides a rental income, that, of course, they enjoy, but they want to get out of the landlord business. The pooled income fund looks to be a method of monetizing a property that otherwise would incur a large capital gain,” says Gavin Morrissey, JD, director of advanced planning for Commonwealth Financial Network in Waltham, Massachusetts.

“One problem is that real estate comes with a built-in liability to whoever owns it. If you donate it to a charity, the charity is then exposed to the liability that goes with ownership,” Morrissey notes.

Here’s an example of how this works: Howard (age 67) and Mary (age 64) Peterson have been retired for four years. They own a highly appreciated piece of real estate (worth $750,000 with a tax basis of $100,000) and are in the 35% tax bracket. They are tired of managing their property and are deciding whether or not to sell it. The Petersons are looking for potentially better current income, diversification, elimination of management hassles and professional money management without having to pay an estimated $130,000 in capital gains taxes, in addition to any depreciation recapture taxes.

The best solution is an alternative choice to contribute their real estate to a pooled income fund product that accepts real estate properties. First, the Petersons would be able to eliminate capital gains and depreciation recapture taxes (to the extent the property is a capital asset and not subject to a mortgage). Second, by having the entire $750,000 contributed, the Petersons receive income for life (assuming an estimated yield of 7%) of approximately $52,500 annually and approximately $1,312,500 during their lives (assuming joint life expectancy of 25 years after donation). The Petersons understand that all income distributions to the income beneficiaries are subject to federal and/or state tax.

Lastly, the Petersons were eligible to receive a current income tax deduction of approximately $250,000. Upon the death of their last income beneficiary, the remainder principal is to be donated to the nonprofit organizations they recommended.

Financial advisors that have access to good pooled income funds have “good news” to call their clients with. Just imagine calling your clients and saying, “You have a number of appreciated assets including your rental properties. We should get together to discuss how you may be able to use those assets and turn them into a tax deduction, income for life, a charitable gift. There will be no capital gain tax and this could lower your estate tax.” Sounds pretty good, doesn’t it?

Mark Quam is CEO of Welton Street Investments LLC (WSI), the Managing Broker/Dealer and distributor of the Life Income Funds of America. For a free copy of The Guide to Pooled Income Funds, contact the author by e-mail at [email protected].


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