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A pooled income fund can provide tax benefits and support for charities.
A pooled income fund is a type of charitable trust established and maintained by a qualified nonprofit organization. The fund receives irrevocable contributions from one or more individuals, a family or a charity. Donors may qualify for an immediate partial tax deduction, based on their life expectancy and anticipated income stream, but they must pay income tax on the income stream from the fund each year.
The fund invests the contributions to provide dividends for the fund contributors. Contributors receive income distributions during their lifetimes. After they have passed, the fund distributes the remaining assets to the designated charity or charities.
A popular alternative to a pooled income fund is a donor-advised fund. A donor-advised fund is like a charitable investment account sponsored by a charity. When you contribute to a donor-advised fund, you are eligible for an immediate tax deduction, and your donation can grow tax-free and be granted to charitable organizations at any time. However, donor-advised funds do not generate income for the donor. (For more information about donor-advised funds, see “Alternatives to a pooled income fund” below.)
A pooled income fund is a type of charitable trust that gets its name from the fact that contributors’ resources are pooled for investing purposes. Unlike a giving circle, in which donors pool resources and agree on which nonprofits to support, there is no collaboration among donors. In fact, the funds are not distributed to charity until after the donor is deceased.
A pooled income fund also differs from a giving circle in that it allows you and/or your designated beneficiaries to receive regular income distributions for life. The amount of income you receive varies and depends on the performance of the investments held by the trust, regardless of the number of contributors to the fund. In general, you should receive more income if you contribute more assets (depending on the performance and value of the assets). The fund takes into account IRS life expectancy tables and the fair market value of the assets at the time of the transfer to determine income distribution amounts.
The frequency of income distributions from the pooled income fund is usually quarterly or annually, although some funds allow you to choose a payment frequency that suits your needs. However, the trustee of the pooled income fund must distribute income within 65 days after the close of the taxable year in which the income is earned.
Note that there is no special tax treatment for payments to the donor from a pooled income fund. The IRS considers trust income distributions to be ordinary income, subject to income tax. Upon the death of the last income beneficiary, the fund's remaining balance goes to his or her 501(c)(3) charity of choice.
Generally, you can contribute any liquid asset to a pooled income fund. Commonly used assets include:
Some pooled income funds may also permit donations of other types of assets. These less-commonly accepted assets include:
In addition to providing an income stream, pooled income funds do offer tax benefits. As mentioned earlier, assets contributed to the fund qualify for an immediate income tax deduction. The amount of the deduction depends on the gift's fair market value, the beneficiary or beneficiaries' age and the fund's rate of return.
Assets contributed to a pooled income fund are also removed from the value of the estate, which could help limit the impact of applicable federal estate taxes. This also means that assets in a pooled income fund avoid probate if the estate enters probate. Donors will know exactly where the fund's remaining balance goes—to a select charity or set of charities.
Finally, when you donate long-term appreciated securities, whether to a pooled income fund or for another charitable purpose, such as to set up a donor-advised fund, the donor avoids capital gains taxes and receives a deduction based on the securities' full fair-market value.
Donors to this type of fund generally have limited choices in investment strategy. Because fund performance depends on investment market fluctuations, income (and the value of the assets in the fund) may vary.
Assets in the pooled income fund are not available to support charities during the donor’s lifetime. If a donor wants to provide that support, he or she may need to consider other options. Also, contributions to a pooled income fund are irrevocable.
Both pooled income funds and charitable remainder trusts allow you to receive an income stream as well as a partial tax-deductible donation. With a charitable remainder trust, the annual distribution must be from 5 percent to 50 percent of the trust's assets. Establishing a charitable remainder trust also typically requires a larger contribution than a pooled income fund.
Income and capital gains tax treatment also differs between these two giving methods. For pooled income funds, the deduction is determined by several variables, including the gift’s fair market value, an IRS-determined rate of return and the age(s) and number of income beneficiaries. For a charitable remainder trust, the partial income tax deduction is based on the term and type of the trust, the projected income payments and IRS interest rates that assume a certain rate of growth of trust assets.
Other charitable options include:
These options are available because donors have different needs. If, for example, you need a stream of income within your lifetime or to provide for a spouse or family member, you may want to explore income-generating methods of charitable giving, including a charitable remainder trust or charitable gift annuity, as well as a pooled income fund.
However, for many people, generating a revenue stream is not a primary consideration for charitable giving. Instead, they’re more concerned about donating appreciated securities, getting a current income tax deduction, minimizing taxes and maximizing giving, or leaving funds to heirs as a part of an estate.
If the primary need is not income, alternate giving methods may better serve the donor’s wishes. For example, a donor-advised fund offers all of the above benefits, plus the ability to grow funds for charity tax-free over time.
And for some donors, the best solution is a mix of charitable giving options. These options often involve complex questions, and there are many variables. A tax, wealth or estate advisor may be able to help match you with the best options for your goals and circumstances.
Since 1991, we have been helping donors like you support their favorite charities in smarter ways. We can help you explore the different charitable vehicles available and explain how you can complement and maximize your current giving strategy with a donor-advised fund. Join nearly a quarter million donors who choose Fidelity Charitable to make their giving simple and more effective.