Pooled Income Funds
Unlike charitable remainder trusts and charitable lead trusts that are set up by the donor(s), a pooled income fund is a trust established and maintained by the charitable remainderman of the fund. Again unlike charitable remainder trusts and charitable lead trusts that are typically funded by very few donors, pooled income funds anticipate, and must provide for, multiple donors, each of which contributes an irrevocable remainder interest in his or her portion of the fund to the charitable donee. Each donor retains a life income interest for himself or for one or more other individuals living at the time of the gift. In addition, the charitable remainderman can be designated as one of the beneficiaries of an income interest. Donors and life income beneficiaries may not serve as trustees of a pooled income fund.
Property transferred to the fund by each donor must be commingled with, and invested or reinvested with, property transferred by other donors (thus the name "pooled fund"). A pooled income fund is required to distribute all of its income annually, and may not distribute corpus to a life income beneficiary. As a result, annual distributions to life income beneficiaries may vary significantly from year to year. In addition, the governing document of the trust must prohibit the fund from accepting or investing in tax-exempt securities.
Pooled income funds are taxable, rather than tax-exempt, trusts and tax rules applicable to regular complex trusts apply. As a result, the trust receives a deduction for income distributed to life income beneficiaries, but pays no tax on net long-term capital gains retained in the trust since those amounts must be permanently set aside for charitable purposes and qualify the trust for a charitable contribution deduction. Short-term capital gains retained in the trust and added to corpus may be taxable to the trust. In addition, a pooled income fund is subject to the tax on unrelated business income.
The value of the charitable remainder is determined according to highest rate of return the fund earned in any of the three tax years preceding the transfer. Special rules apply in determining the rate of return assumed by a pooled income fund during its first three years of operation. The higher the rate of return, the lower the value of the charitable remainder that can be deducted.
Pooled income funds are subject to some of the provisions applicable to private foundations. Under these rules, the governing instrument must include provisions prohibiting self-dealing and taxable expenditures.
A transfer to a pooled income fund may be advantageous over a transfer to a charitable remainder trust if the value of the contributed property is insufficient for the donor to establish a separate charitable remainder trust. Use of a "single person" pooled income fund may be appropriate when the donor can benefit from a current income tax deduction, is willing to assign the remainder interest in property to a public charity, but must retain all of the income of the property for the remainder of his or her life.
©2008 Ronnie C. McClure, PhD, CPA