8097 / What is a pooled income fund?
A pooled income fund is a trust maintained by the charity into which each donor transfers property and from which each named beneficiary receives an income interest. The amount of the income is determined by the rate of return earned by the trust for the year. The remainder interest ultimately passes to the charity that maintains the fund.1
All contributions to a pooled income fund are commingled, and all transfers to it must meet the requirements for an irrevocable remainder interest. The pooled income fund cannot accept or invest in tax-exempt securities, and no donor or beneficiary of an income interest can be a trustee of the fund.2
Special rules apply to contributions (if permitted) of depreciable property. A pooled income fund that is not prohibited (either under state law or its governing instrument) from accepting contributions of depreciable property must (1) establish a depreciation reserve fund with respect to any depreciable property held by the trust; and (2) calculate the amount of depreciation additions to the reserve in accordance with generally accepted accounting principles.3 The purpose of these requirements is to ensure that the value of the remainder interest is preserved for the charity.4
The amount of the charitable contribution deduction allowable for a donation of property to a pooled income fund is the present value of the remainder interest. The present value of the remainder interest is determined by subtracting the present value of the income interest from the fair market value of the property transferred.5 The present value of the income interest is based on the highest rate of return earned by the fund for any of the three years immediately preceding the taxable year of the fund during which the contribution is made. If the fund has not been in existence for three years, the highest rate of return is deemed to be the interest rate (rounded to the nearest 2/10ths of 1 percent) that is 1 percent less than the highest annual average of the monthly IRC Section 7520 interest rates for the three years preceding the year in which the transfer to the fund is made.6 The deemed rate of return for transfers to new pooled income funds in 2025 is 4% (3.8% for 2024).7
Under regulations, the definition of “income” for pooled income funds is amended to reflect certain state statutory changes to the concepts of income and principal. (See Q 8089 for additional background.) The regulations provide that the term “income” has the same meaning as it does under IRC Section 643(b) and the regulations, except that income generally may not include any long-term capital gains. However, in conformance with applicable state statutes, income may be defined as or satisfied by a unitrust amount, or pursuant to a trustee’s power to adjust between income and principal to fulfill the trustee’s duty of impartiality, if the state statute: (1) provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust; and (2) meets the requirements of Treasury Regulation Section 1.643(b)-1. In exercising a power to adjust, the trustee must allocate to principal, and not to income, the proceeds from the sale or exchange of any assets contributed to the fund by any donor or purchased by the fund at least to the extent of the fair market value of those assets on the date of their contribution to the fund or of the purchase price of those assets purchased by the fund.8
A group of pooled income funds will be treated as a single community trust if the funds operate under a common name, have a common governing instrument, prepare common reports, and are under the direction of a common governing board that has the power to modify any restriction on distributions from any of the funds, if in the sole judgment of the governing body, the restriction becomes unnecessary, incapable of fulfillment, or inconsistent with the charitable needs of the community or area served.9 A pooled income fund is considered maintained by such a trust if, in the instrument of transfer: (1) the donor gives the remainder interest to the community trust with full discretion to choose how the remainder interest will be used to further charitable purposes, or (2) the donor either requests or requires that the community trust place the proceeds of the remainder interest in a fund that is designated to be used for the benefit of specific charitable organizations provided the fund is a component part of the community trust.10
Examples of the calculation for the amount of a charitable contribution deduction of property transferred to a pooled income fund are provided below.
Example 1: In July of 2024, Mr. Green transferred property worth $100,000 to a pooled income fund. Income is to be paid to Mrs. Green (age 70) for life. Assume the highest rate of return earned by the fund for any of the three years immediately preceding 2024 was 5.2 percent.
The value of the remainder interest payable to charity is calculated as follows:
(1) Find the single life annuity factor for a person age 70 at a 5.2 percent rate of return – 9.7309 (from Single Life Annuity Factors Table).
(2) Convert the factor in (1) to a remainder factor: 1 – (9.7309 × rate return of 5.2 percent) = .49399.
(3) Multiply the value of the property transferred to the pooled income fund ($100,000) by the factor in (2) (.49399). The amount of the charitable contribution deduction is $49,399. (The same procedure applies to calculating a remainder interest following a pooled income interest for a term certain. However, Term Certain Annuity Factors are used instead of Single Life Annuity Factors.)
Example 2: Assume the same facts as in the preceding example except that the highest rate of return earned by the fund for any of the three years immediately preceding 2024 was 5.15 percent. The 5.15 percent rate of return falls between interest rates for which factors are given. A linear interpolation must be made.
The value of the remainder interest payable to charity is calculated as follows:
(1) Find the single life annuity factor for a person age 70 at a 5.0 percent rate of return – 9.8828 (from Single Life Annuity Factors).
(2) Convert the factor in (1) to a remainder factor: 1 – (9.8828 × rate of return of 5.0 percent) = .50586.
(3) Find the single life annuity factor for a person age 70 at a 5.2 percent rate of return – 9.7309 (from Single Life Annuity Factors Table).
(4) Convert the factor in (3) to a remainder factor: 1 – (9.7309 × rate of return of 5.2 percent) = .49399.
(5) Subtract the factor in (4) from the factor in (2): .50586 – .49399 = .01187.
| (6) | 5.150% – 5.000% | = | X |
| 5.200% – 5.000% | .01187 | ||
| X = .0089 | |||
(7) Subtract X in (6) from the remainder factor at 5.0 percent from (2): .50586 – .0089 = .49696.
(8) Multiply the value of the property transferred to the pooled income fund ($100,000) by the interpolated remainder factor in (7) (.49696). The amount of the charitable contribution deduction is $49,696. (The same procedure applies to calculating a remainder interest following a pooled income interest for a term certain. However, Term Certain Annuity Factors are used instead of Single Life Annuity Factors).
The deduction is subject to the regular percentage limits discussed in Q 8070. See Q 8079 for a comparison of pooled income funds with charitable remainder trusts. See Q 8087 for an overview of certain requirements applicable to all such gifts.
1. IRC § 642(c)(5).
2. IRC § 642(c)(5); Treas. Reg. § 1.642(c)-5(b).
3. Rev. Rul. 92-81, 1992-2 CB 119.
4. Rev. Rul. 90-103, 1990-2 CB 159; Let. Rul. 9334020.
5. Treas. Reg. § 1.642(c)-6(a)(2).
6. Treas. Reg. § 1.642(c)-6(e).
7. Rev. Rul. 2023-1, Rev. Rul. 2024-02, Table 6.
8. Treas. Reg. § 1.642(c)-5(a)(5)(i).
9. Treas. Reg. § 1.170A-9(e)(11)(i).
10. Rev. Rul. 96-38, 1996-2 CB 44; See Treas. Reg. § 1.170A-9(e)(11)(ii).