Pooled Income Fund Tax Benefits
Content provided for general information. Talk to your advisor to learn about recent updates or other rules that may apply to your situation.
A pooled income fund is a type of trust where you give money to charity in exchange for regular income. It can qualify for a charitable donation deduction.
How does a pooled income fund work?
A pooled income fund is a mix of investing in a mutual fund and creating a charitable gift annuity.
You and other donors donate money into the charity’s income pool. The charity invests the money and makes regular payments to you based on the pooled income fund’s investment performance.
The payments last for your life or the life of another beneficiary you designate. The charity keeps any remaining principal or excess investment returns.
Pooled Income Fund Tax Deduction
You can generally receive an immediate income tax deduction when you donate to a pooled income fund. However, since you’re entitled to receive payments, you can’t deduct the full amount of your contribution.
Your charitable donation income tax deduction is generally equal to the present value of the charity’s remainder interest. This is the expected return on investment inside of the pooled income fund minus the expected payments to you.
The present value depends on the age and expected lifespan of the person who will receive regular income distributions (you or your beneficiary) as well as the expected rate of return.
For example, if you calculate that the income distribution amounts will be half of what you contributed plus investment returns, you can generally deduct 50% of your contribution. Ask your tax advisor to help you with the exact calculations.
Once you calculate the amount you’re eligible to deduct, it generally counts as an itemized tax deduction following the usual charitable contribution deduction rules.
Do you pay taxes on pooled income fund payments?
Payments you receive from a pooled income fund generally count as ordinary income subject to state and federal income taxes.
In some cases, a portion of your income payments may be exempt from income tax as a return of capital or eligible for more preferential tax treatments. You’ll need to get the details of how the pooled income fund is structured and talk to your tax advisor.
Can you avoid capital gains tax using a pooled income fund?
It is often possible to avoid or reduce capital gains tax by contributing appreciated assets to a pooled income fund.
When you donate these assets directly, any capital gains tax that you would have paid generally goes away. Like the charitable contribution deduction, the amount you can exclude from capital gains tax can depend on what portion of your contribution is considered to go to the charitable organization.
So you might only be able to exclude half of the capital gains and have to pay capital gains tax on the rest at the time of your contribution.
Before you donate appreciated securities, you should ask your tax advisor about impacts such as possible capital gains taxes, being moved into a higher capital gains tax bracket, or having a higher Adjusted Gross Income that could affect your eligibility for other tax benefits.
Exception: Tax-Exempt Securities
Due to IRS regulations, pooled income funds generally can’t accept contributions that are exempt from taxes, such as municipal bonds. Therefore, the only way to contribute funds from tax-exempt securities would be to sell them and recognize a taxable capital gain and then donate cash.
If you have appreciated tax-exempt securities, ask your tax advisor about contributing them to a donor-advised fund or other options that may help you avoid capital gains tax.
Less Commonly Used Assets
Pooled income funds can generally choose what types of assets to accept. This might be due to tax and accounting requirements or to efficiently manage the fund.
Most pooled income funds accept cash, stocks, and mutual funds. Some funds may accept assets such as life insurance policies, real estate, non-publicly traded securities, or tangible assets.
Ask each pooled income fund for its list of acceptable contributions.
Your income tax deduction will generally be based on the fair market value of the assets adjusted for the portion that goes to charity as discussed above.