Everybody into the pooled-income funds! — Business Management Daily: Free Reports on Human Resources, Employment Law, Office Management, Office Communication, Office Technology and Small Business Tax Business Management Daily
  • LinkedIn
  • YouTube
  • Twitter
  • Facebook
  • Google+

Everybody into the pooled-income funds!

Get PDF file

by on
in Small Business Tax

Although charitable remainder trusts (CRTs) can still provide big-time tax benefits for donors if they’re set up properly, proceed with caution, since the IRS has targeted CRTs that it considers “abusive.”

Strategy: Donate cash or other assets to a “pooled income fund,” instead. As with a CRT, you grab a current deduction for a future gift, while continuing to receive a stream of income. But pooled-income funds draw less IRS scrutiny and create less paperwork than CRTs.

Let’s compare the two.

CRTs: You transfer assets to the trust after creating a charitable remainder trust through a legal document. You (or a beneficiary) are paid annual income during the years the trust is in effect. When you die, the remainder passes to a pre-designated charity.

The big tax payoff: a current deduction for your future gift. The deduction equals a percentage of the amount you transfer to the CRT. The exact write-off amount is based on special IRS tables.

Pooled-income funds: All the hard work is done for you: A charity, such as an education institution, museum or other large organization, sets up the trust, and professional money managers invest the money. All you do is donate.

When you die, the charity cashes in the assets, so the result is essentially the same as with a CRT.

The big tax payoff: an up-front deduction, just as with CRTs, but without the IRS scrutiny.

The charitable organization may offer you a choice of pooled-income funds. One fund may emphasize long-term growth, for example, while another may be aimed at maximizing current income. You can choose the type of fund that best meets your objectives.

Usually, a minimum amount—$5,000 or $10,000, for example—is required for your initial investment. You can donate smaller amounts in subsequent years once you’re in the pool.

The good news: The sky’s the limit if you want to stash even more in the pooled- income fund.

You can do even better by donating appreciated stock to the pooled-income fund. So, you receive the appreciation benefit without ever paying tax on it.

Example: You purchased $10,000 worth of stock years ago that’s now worth $50,000. If you sell the stock, you’d have to pay federal and state capital gains taxes of $8,000 on your $40,000 profit, leaving you with a total of $42,000.

But, if you donate the stock to a pooled-income fund, you receive the benefit of investing the entire $50,000.

Caution: The annual income from the trust fluctuates according to investment performance.

That could cause a problem if you’re counting on the income during your retirement. As an alternative, you might set up a charitable gift annuity that provides fixed payments.

Related Articles...

Leave a Comment

Previous post:

Next post: