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.)
How a pooled income fund works:
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.
The information on this website is not intended as legal or tax advice. For such advice, please consult an attorney or tax advisor.
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