This blog is the sixth in a series of seven regarding the possibilities and benefits of planned giving. This series strives to provide helpful information for those seeking knowledge about incorporating charitable gifts into estate plans, but there is no substitute for experienced counsel for planned giving and wealth planning.

Should You Invest in a Charitable Pooled Income Fund?

A charitable PIF provides income for the donor and/or his or her designated beneficiaries, offers tax advantages, and allows for planned charitable giving to an organization you choose. If you are considering contributing to a charitable pooled income fund, there are several factors to consider. These funds are similar in some ways to other financial and legal vehicles used for charitable giving, such as giving circles, donor-advised funds, and charitable remainder trusts, but there are also important differences to note.

The Broad Strokes: What Is a Pooled Income Fund?

A pooled income fund is a form of trust held by a charitable organization. The fund receives gifts from multiple contributors and pools those resources for greater investment potential. Income distributions are made to each donor’s designated beneficiary (often the donor) or beneficiaries for the remainder of their lives. Upon the death of the last beneficiary, the remaining assets contributed by that donor are distributed to the nonprofit organization.

The Finer Points: How Does a Charitable PIF Work?

The Creation and Management of Pooled Income Funds

Pooled income funds must be created and maintained by organizations that are qualified to maintain a charitable PIF under the rules of the Internal Revenue Service (IRS). Banks or other financial professionals can serve as trustees and manage the funds, but the charitable organization must retain the right to remove or replace the trustee for the funds to qualify for IRS treatment as a charitable PIF.

Universities, hospitals, religious organizations, and community foundations are groups that commonly maintain a charitable PIF or multiple PIFs from which donors can choose to support specific goals of the organization. The assets donated to a PIF are commingled for investment purposes.

When an individual contributes to a pooled income fund, he or she designates a beneficiary or beneficiaries who will receive income distributions from the fund throughout their lifetimes. The donor is often the beneficiary or one of the beneficiaries. When multiple income beneficiaries are named, those individuals can receive distributions concurrently, consecutively, or both.

The nonprofit organization can also be named an income beneficiary if the donor chooses. With the exception of a nonprofit income beneficiary, the donor can generally reserve the right to remove income beneficiaries if the instrument of transfer specifies this authority.

Tax Benefits and Taxation of PIFs

Contributions to a charitable PIF result in a charitable tax deduction for the donor that can be claimed immediately. However, only the remainder assets expected to benefit the charity are tax-deductible. The partial deduction is calculated by a formula that determines the current value of the remainder based on factors including the fair market value of the assets and the number, age, and life expectancy of the income beneficiaries.   

Pooled income funds can also reduce estate taxes in some cases and, when appreciated assets are invested in a charitable PIF, the donor does not incur capital gains taxes on the sale of those assets by the fund.

The remainder assets in a PIF are irrevocable, while the donor retains an income interest for the duration of his or her life and/or the lives of any designated beneficiaries. Recipients of this income, unless they are a tax-exempt nonprofit, pay standard income taxes on these payments. If income beneficiaries include individuals who are not the donor, gift taxes may be assessed.

The tax benefits and tax liability applied to assets held in and income distributed from a charitable PIF vary based on the details of the fund and those specified in the instrument of transfer. To ensure your investment meets the goals intended, it is vital to seek counsel for planned giving from a knowledgeable wealth planning attorney.

The Brass Tacks: Is a Charitable Pooled Income Fund Right for You?

With a generally lower investment requirement than charitable remainder trusts and an income advantage not offered by giving circles or donor-advised funds, charitable PIFs can be a good option for some people. However, in many cases, another financial or legal vehicle is a better fit for helping a donor realize the benefits of planned giving.

The types of contributions that can be made to a pooled income fund are limited both by the specific requirements of individual funds and IRS regulations. For example, the IRS prohibits the donation of tax-exempt securities to PIFs.

The structure of beneficiary designations in charitable PIFs is quite flexible. However, this flexibility comes at the cost of more complex rules and impacts on the taxation and tax benefits of assets contributed to and distributed from these funds. If you are seeking a tool for the conveyance of charitable gifts that offers income and tax benefits, a charitable income fund is one option to consider among several others.

The Best Bet: Experienced Counsel for Planned Giving

Working with experienced counsel for planned giving can help ensure that the charitable giving tool or tools you include in your estate plan serve your best interests, protect your wealth, and provide the full benefits of planned giving to the organization or organizations you wish to support. To discuss the pros and cons of a charitable pooled income fund versus other tools, contact attorney Anna M. Price at Jenkins Fenstermaker, PLLC. You can reach Anna by calling (304) 523-2100 or completing the firm’s online contact form.