How Pooled Income Funds Work

A Pooled Income Fund (PIF) is a charitable trust established and maintained by a qualified nonprofit organization. The fund is considered a “life income fund” and receives irrevocable contributions from one or more individuals. 

The contributed assets are irrevocable and cannot be taken back. They are invested and the resulting dividends are given to the fund contributors as earned income. 

PIF contributors receive income distributions during their lifetimes; however, once they have passed away, the fund’s remaining assets are distributed to the designated charity or charities. 

What are the benefits of PIFs? 

One of the leading benefits of a PIF is that more than one person can contribute funds. Because of this, resources can be pooled and invested thereby yielding greater dividends. Contrary to other funds and trusts, ongoing contributions can be added at any time to grow the fund’s corpus. Since the fund is not distributed to charity until the donor(s) are deceased, the donor(s) will receive regular income distributions for life (usually quarterly or annually). The individuals who contributed more assets will likely receive more income. 

These life-income funds are helpful for charities because, if selected as a designated beneficiary, they will receive the remainder of the fund upon the death of the last income beneficiary. 

Note: Upon the death of the last income beneficiary, the remaining principal typically passes through the institution holding the fund to the charity of choice. While funds typically go to a charity, they can also be used to establish a Donor Advised Fund (DAF). 

What are the tax implications of PIFs? 

Individuals contributing to a PIF may qualify for an immediate partial tax deduction. The amount of the deduction depends on the gift’s fair market value, the beneficiary’s age, and the PIFs rate of return. What’s most important to note is, because there aren’t special tax treatments for payment to the donors from a PIF, the IRS considers trust income distributions to be ordinary income. Because of this, PIF income recipients must pay income tax on their PIF income. 

Assets contributed to a PIF are no longer considered part of the donor’s estate. For this reason, various federal estate taxes can be alleviated. Further, assets in a PIF will never enter probate, even if a donor’s estate enters probate. The remaining balance of a PIF, upon the death of the last income beneficiary, always goes to a select charity, set of charities, or Donor Advised Fund. 

Who would use a PIF? 

• Someone looking to make a charitable gift, but still benefit from lifetime income for themselves and/or beneficiaries;

• Someone desiring large income tax deductions (charitable deductions for PIFs exceed those for CRTs and CGAs);

• Someone needing to avoid capital gains taxes on appreciated investments/assets;

• Someone looking to re-balance their investment portfolio or liquidate non-cash assets on a tax-free basis;

• Someone wanting to create a legacy of giving for children and grandchildren; and

• Someone needing to offset estate taxes and desiring to help charity at the same time.

How to Turn Non-Cash Giving into Current Giving with a PIFMany charities are concerned about taking on debt and want cash now. Properly structured, the loan from the PIF is interest only, that reduces over time (as people die), and there is no repayment of principal.

For example, consider the following mix of donors to a PIF:

In this scenario, which is a “proof of concept,” each donor couple contributes $1 million (for a total of $10 million) and receives income for life, with their interest in the PIF passing at death to the charity. If each donor couple lives to their joint life expectancy (according to IRS tables), the interest payments on the loan of $10 million would visually look like:

What is the net present value of the PIF, compared to a conventional 5% commercial loan? It’s 41.6%. How can this be correct? The PIF loan acts like a 5% interest-only loan, which reduces over time as people die (there is a long history of this), and for which there is no repayment of principal (a deceased couple’s interest in the fund passes to the charity at death).It would be nice if we, as individuals, could borrow money to buy a home, and never have to repay principal. We cannot do so, but a charity can.

*Scenario and graphics provided by Emanuel J. Kallina, II and CharitablePlanning.com.