This article contains details specific to United States (US) investors. It does not apply to non-US investors.
A pooled income fund is a trust that is established and maintained by a public charity. Individual donors can irrevocably contribute cash or appreciated investment securities (with the exception of tax-free bonds which the trusts are forbidden to hold) to the fund. The charity can sell the assets free of taxation and invest the proceeds in a commingled investment fund.
In practice, a pooled investment fund operates much like a mutual fund. A donor is free to make additional donations to the pool. Each year, a pooled income fund is required to distribute a pro rata share of all its earned income to its income beneficiaries. After a beneficiary’s death, the remainder interest is distributed from the fund to the charity.[1]
A donor can choose up to two income beneficiaries to receive income for life.
A donor can receive a number of tax benefits with a contribution to a pooled fund. First, a donor will receive a charitable deduction based on the discounted value of the remainder interest flowing to the charity after the donor/ beneficiary’s death. The charitable deduction is calculated based on the amount of the contribution, the age and number of the income beneficiaries, and the pooled income fund's highest rate of return during the past three years. Secondly, if the donation is made with appreciated assets, the donor can escape capital gains taxation with the donation, since the charitable pooled fund is not taxed on selling the appreciated asset.[1]
Information on the investment returns, portfolio holdings, and costs of pooled income funds is not readily available. Fidelity provides a stand alone pooled income fund that allows for transparency.
According to the latest (2012) IRS Statistics of Income (SOI) report, [2] there were 1,324 charitable pooled income funds filing tax returns in 2012, holding a collective 1.255 billion dollars in assets. The overwhelming majority of these pooled trusts are quite small. Pooled income funds occupy a distant third among charitable split-interest vehicles behind charitable remainder trusts and charitable gift annuities.[2]
Given the mandate that all pooled fund income must be distributed to the income beneficiaries, it should come as no surprise that pooled income funds set asset allocations tilted towards income producing securities. The 2012 tax return totals for pooled income funds showed the following asset holdings:
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This article contains details specific to United States (US) investors. It does not apply to non-US investors.
