Q. What is a Pooled Income Fund?
It is a special fund contributed to by any number of donors with the understanding that each donor will receive income from the Fund during the rest of their lives (or for the lives of the persons they designate to receive the income). When each donor (or their designee) dies, the value of those shares becomes the property of the charity for its charitable purposes. Gifts to the fund are "pooled together" for the purpose of creating income.
Q. How is the life income interest determined and how frequently is this income paid?
A donor's life income gift is represented by participating units in the Fund, similar to a mutual fund arrangement. The amount of income is determined by the rate of return earned by the entire Fund for that year. Payment of income usually is made quarterly, but more frequent payments for the fund can be designed. Sometimes there is no annual fee taken by the charity while acting as trustee of the Fund.
Q. Is it possible for the Life income Agreement to provide income for two persons for as long as they live?
Yes. This is called a Two-Life Income Agreement.
Q. What types of assets are usually contributed by donors to a Pooled Income Fund?
Normally, long-term appreciated securities or cash. The tax laws do not permit the acceptance or investment by a Fund in tax-exempt securities, real estate or depreciable assets.
Q. What are the advantages of funding a Life Income Agreement with long-term appreciated securities?
The value of the charitable remainder gift would be based on the fair market value of the securities contributed, not the donor's cost basis. In addition, there would be no capital gains implications when appreciated securities are transferred to the Fund or later sold. A Pooled Income Fund also pays no capital gains taxes on sales of securities if the donor's holding period was longer than one year. Under the tax laws, the Fund takes over the donor's holding period. Thus, if the donor's holding period for the securities contributed to the Fund was more than one year, there will be no capital gains tax on a sale made by the Fund. Even if the donor should contemplate a Two-Life Income Agreement, there will be no capital gains tax involved on the transfer of appreciated securities.
Q. Can a donor become a participant in the Pooled Income Fund at any time during the year?
Yes, there are no restrictions on when a donor can come into the Pooled Income Fund.
Q. What are the income tax advantages to the donor if he or she invests in a Pooled Income Fund?
The donor will be entitled to an immediate charitable contribution deduction in the year of the donor's gift on the donor's personal tax return. The amount of the donor's charitable deduction is determined by federal government tables. The donor's charitable gift would be reduced by the present value of the donor's life income interest. The actual deduction will be dependent on the age of the designated beneficiaries and the size of the donor's contribution. The charitable deduction will be smaller in the event the donor desire a Two-Life Income Agreement, since it then would be dependent on the age of both beneficiaries.
Q. How much is a donor allowed as a present income tax charitable deduction on a contribution, and can any excess donation carry over on subsequent income tax returns?
Generally if the donor's gift to a Fund is in money, the donor would be allowed to take a charitable deduction of up to 50 percent of the donor's adjusted gross income. If the donor's charitable gift is over the permissible annual contribution deduction, the donor is allowed to carry the excess over into the next five (5) succeeding tax years — thus, six years in all. If the donor's gift, on the other hand, is of long-term appreciated securities, the donor is entitled to a 30 percent deduction on the donor's adjusted gross income, again with a five-year carryover of any excess charitable contribution.
Q. What is the situation as to federal estate taxes should a donor become a participant in a Pooled Income Fund?
Should the donation to a Fund be based on the donor's life income alone, the total value of the donor's interest in a Pooled Income Fund would effectively be removed from the donor's taxable estate. However, if the donor's gift involves the donor's life and that of a non-spouse, the survivor's life interest would be subject to federal estate tax based on the survivor's age at the donor's death. Should the other beneficiary be the donor's spouse or not survive the donor, no part of the donor's interest in a Pooled Income Fund would be subject to tax in the donor's estate under present law.
Q. Besides favorable tax benefits to me, what are some of the other advantages of a Pooled Income Fund gift?
Greater diversification of assets than if the donor established a separate charitable remainder annuity trust or unitrust. The opportunity to convert low-yield securities to a higher-yield common diversified fund at low or possibly no tax cost. Permitting the direct distribution of Fund property at death, thus reducing probate expenses and delays.