Take a Dip in the Pool

If appreciated property is donated to a pooled income fund, no gain is recognized by the donor upon the transfer. The donor may retain a life income interest for him/herself, a spouse and/or some other individual(s). If the income beneficiary is someone other than the donor and his/her spouse, then additional estate and gift tax implications come into play. The asset donated to the fund is removed from the estate of the donor.

So far, pooled income funds sound an awful lot like CRTs. So, what's the difference? First, pooled income funds are managed by the charity itself. Therefore the donor has no input into the investment decisions or the choice of investment managers. The income stream to the donor is based on the performance of the fund, rather than on a fixed dollar amount or fixed percentage of assets. Each donor is assigned a certain number of units in the fund depending on the amount of the contribution. These units operate like the shares in a mutual fund. The return to the donor is based on the income of the fund divided by the total number of units times the number of units owned by the donor.

In a CRT, the deduction is based, in part, on the trust's payout rate. The deduction for a pooled income fund is based on the highest yield per unit in its most recent three years. If the pooled income fund has not been in existence that long, IRS tables provide a yield. A CRT that is funded with cash can invest in municipal bonds and, depending on the terms of the trust, payout tax-free income.

Pooled income funds, on the other hand, are prohibited from owning tax-exempt obligations. CRTs, if properly drafted, allow donors the ability to reduce cash flow in years when their income needs are low and increase cash flow when income needs are high. Pooled income funds pay cash based on performance, not donor circumstances.

Pooled income funds seem most appropriate for donors who are charitably inclined but lack the resources to create their own CRT. Like a mutual fund, pooled income funds allow many small donors to work together to achieve a common objective. They are significantly less expensive to establish and maintain, from the donor's perspective, than a CRT. However, they lack the design and investment flexibility of CRTs.

Of course, this brief article is no substitute for a careful consideration of all of the advantages and disadvantages of this matter in light of your unique personal circumstances. Before implementing any significant tax or financial planning strategy, contact your financial planner, attorney or tax advisor as appropriate.

Lynn Siewert is the Principal of Advanced Corporate Planning and Branch Manager of the Vancouver, Washington Office of Supervisory Jurisdiction, Licensed through First Allied Securities, Inc. Member NASD/SIPC.