What do you do if you want to make a significant donation to charity, but you also want to maintain an income stream throughout your lifetime? Investing in a pooled income fund might be the answer.
This type of fund allows donors to make contributions of cash, stocks, and other assets. Those assets are pooled with the contributions of other donors and invested. For the remainder of their lifetimes, donors receive regular income distributions from their contributions based on how those investments perform. After the donor dies, their contribution is distributed to one or more 501(c)(3) charities.
Pooled income funds can offer donors tax savings and income stability, but they also have a few limitations. Here are some of the benefits and drawbacks of pooled income funds:
- Donors can receive an immediate tax deduction when they contribute to a pooled income fund.
- A wide range of assets can be accepted as contributions, including cash, stocks, cryptocurrency, fine art, life insurance, and some privately held stocks.
- Assets contributed to pooled income funds are removed from the donor’s estate, shielding them from federal estate taxes and allowing them to avoid probate if the donor’s estate happens to enter probate.
- Capital gains taxes do not apply to securities in pooled income funds.
- Donors can name beneficiaries who can also receive income distributions.
- Donors and their beneficiaries receive income distributions regularly (usually monthly), bringing peace of mind, especially to donors who are no longer working.
- The trustee of the pooled income fund assumes responsibility for managing the trust assets, therefore relieving the donor of management duties.
- Income distributions are considered taxable income and may be subject to the 3.8% net investment tax.
- Contributions to pooled income funds are irrevocable, meaning the donor can’t take back their donation.
- Donors are often unable to choose how their contributions are invested.
- Income distributions vary based on the performance of the assets invested, meaning that a donor can’t predict how much they will receive.
- Since their assets are not given to charities until after they have died, donors cannot see how charities benefit from their contributions.
Despite their limitations, pooled income funds can be an ideal option for those who want to make a future contribution to charity while still maintaining income during their lifetime. If a pooled income fund sounds like it might be a good fit for your giving plan, contact one of CRI’s professionals today.
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