Financial markets are complex and with millions of options out there, it’s tough to know what’ll work and what won’t. And with the complexity of our tax system, it takes time and dedication to find options that work for your financial goals and that’ll leave a legacy. But if you’re looking for an option that works for your family, beneficiaries and provides charitable options for your money, the pooled income fund is a great fund to consider.
These funds are a type of charitable trust and are commonly set up as mutual funds. The fund is established by a public charity and they’re composed of gifts that are pooled together and invested with an income-forward strategy. Income from the fund may be distributed to the participants and may be further distributed to beneficiaries as determined.
As a donor to the fund, you decide who receives the additional income, and upon your death, the value of the remaining assets will be transferred to the beneficiaries you name. This type of fund takes IRS life expectancy and the fair market value of assets to determine income distribution amounts.
As with any investment, the performance of the underlying investments determines income and capital appreciation, if any. Each fiscal year, the fund’s net investment income is distributed to fund participants based on their units of participation. Income distributions are provided to each participant during their lifetime. Upon death, the funds are offered up for the charitable purposes established by the organization that started the fund.
When investing in a Pooled Income Fund, there is no collaboration among donors. All money is pooled and provided to fund management for investment purposes.
This is largely fund-dependent. Any liquid asset qualifies, whether it’s cash, stocks, or mutual funds. But some funds make exceptions and may allow other types of assets. These may include tangible property, bitcoin, noncash assets, and others. This setup is rare though and if you’re interested in this type of investment you should plan on using a liquid asset to participate.
Your total contribution to the fund will determine your units of participation, further determine your income and contributions to the charitable portion of the fund.
Participation in these funds leaves limited choices in investment strategy. As with any investment, the performance of the fund will determine income and is dependent on what the market’s doing.
Assets pooled in this type of fund may not be used for charitable purposes while the donor is alive.
Any assets that are contributed are eligible for an immediate tax deduction. Assets within pooled income funds may also be removed from the value of an estate, which can help reduce total tax liability on any federal and state taxes.
The calculation of tax deductions takes the date of birth, the fair market value of assets, and the fund’s highest rate of return over the preceding three years.
When an investor donates long-term appreciated securities to a charitable purpose, the donor avoids capital gains taxes and receives deductions based on the securities’ fair market value.
Funds in pooled income funds avoid probate as well as beneficiaries will know where the funds are being contributed ahead of time.
It’s also worth noting that those who contribute to pooled income funds will not realize gains or losses on the transfers to the fund when it comes to tax liability. This is ideal for those who have appreciated, low-yield assets and would like to exchange them for assets that offer higher cash flow.
There are other charitable options and they include giving circles, charitable remainder trusts, donor-advised funds, charitable gift annuities.
Both pooled income funds and charitable remainder trusts provide income streams and tax-deductible donation benefits. Charitable remainder trusts tend to have more strict guidelines for establishing and maintaining the fund and require a higher upfront investment to establish the fund and take advantage of the benefits.
Taxation for pooled income funds and charitable remainder trusts are calculated differently. For the charitable trust, the tax benefit is based on the type of trust, projected income payments, and IRS interest rates.
Giving circles are designed to allow a group to pool their resources in order to create a greater impact. Giving circles may be formal or informal and the structure of each largely depends on the goals and contributions of each member of the group. The required investments to join these groups also varies and research should be done to determine whether a giving circle is a good fit for your financial goals.
Each of these provides advantages based on the donor’s needs. And while there are income-generating options, most donors are interested in income tax deductions and maximizing giving. It’s best to consult with your financial services professional to weigh options and see what provides the best mix of advantages based on your current and future financial situation.
There’s no straight answer here. Your goals should dictate your investment strategy and pooled income funds have a place in most portfolios. Keep in mind that pooled income funds are ideal for those who already have money saved and who’d like to earn regular, passive income on their capital while supporting their favorite charitable cause. If real assets are more of your thing, Commercial real estate investing is another great option for those who looking to diversify their portfolios.
The best practice is to consult your financial services professional, think about your goals, and plan for your financial future based on your current situation. Keep in mind that not every fund is a good fit and there are risks with trading any investment.
When you’re ready explore how you can make your money work for you, get your professional guidance for your investment decisions from proven experts in financial services — Saint Investment Group. Contact our team for a free consultation and discover more ways to make your money for you today.
A master in Investment, Marketing, and Capital Raising.
Nic has honed his focus on the Real Estate and debt markets with Saint Investment Group and pursues large-scale Distressed Asset purchases with his partners and syndications.