Pooled Income Funds & Net Zero Tax Advantages (Copy)
The story of Israel began with the story of one man, Abram, who, according to Genesis, was called by God to leave Ur and move to a special place for a specific purpose. And as God always does, he underwrote his calling with the promise to resource his mission. According to Hebrews 11:8, the land of Israel would be the inheritance God would give him. Indeed, Abram would become a person blessed with significant wealth. But the blessing of wealth from God was not just for Abram’s own consumption. Here are the words from Genesis 12:2, where God said, “I will make you into a great nation. I will bless you and make you famous, and you will be a blessing to others.” In other words, Abram would be blessed so he could in turn become a blessing to the world!
It is important to recognize that Abram was an income giver. In fact, the first mention of the tithe in Scripture is associated with his act of giving Melchizedek one tenth of all that he had received from the spoils of his victory over Kedorlaomer’s armies. Abram’s act of trust and thanksgiving was rooted in his conviction that God was the source and supply of all that he possessed, affirmed by his rejection of Kedolaomer’s reward, saying “I will not take so much as a single thread or sandal thong from which belongs to you. Otherwise you might say, ‘I am the one who made Abram rich’.” (Genesis 14:23)
As time passed, Abram matured in his faith. God changed his name to Abraham, and in addition to vast material wealth He gave him a son. As Issac grew into adulthood, he took a wife and began his own family. When Abraham died, he bequeathed all of his material wealth to Issac (Genesis 15:5) who in turn carried forward the legacy and mission of his father.
If you read the story of Abraham, several features of his discipleship journey become evident. His trust in God would be so profound that he would become known as “the Father of Faith.” But his generosity is also evident with each turn of the page. He gave a tithe to the priest of the Most High God, he offered financial support to those less fortunate, and ultimately invested in the future of God’s mission to begin a nation by transferring his remaining wealth to his son Issac. Generous people today do the same thing. They give intentionally and regularly to God’s work, they give graciously over and above that amount when opportunity or need arises, and they provide legacy gifts through wise estate planning that includes a charitable component.
David Johnson, age 90, desired to move assets out of his estate and transfer them to his daughter Margo, age 60, and granddaughter Katie, age 30. At the same time, he wanted to enjoy a stable cash flow for his lifetime. David held stock worth $10 million, with a zero basis. He was surprised to learn that he could face capital gains taxes of more than $3 million if he were to sell the stock.
David's advisor told him of a creative way to transfer his wealth while avoiding capital gains taxes. He could put the stock in a Pooled Income Fund (PIF), naming himself, his daughter, Margo, and his granddaughter, Katie, as the income beneficiaries. David would receive an income tax deduction of $3.58 million, which can be carried forward over the next five years, saving him $1.79 million in income taxes. He chose not to reserve a right to revoke the PIF interests passing to Margo and Katie in his will, which completes the gift and triggers a gift tax of $1.74 million. David also incurred a generation-skipping transfer tax of $849,720 on the gift to Katie.
Given Margo & Katie's remaining life expectancies of 48+ years, the present value of the annual payments to them is over $9 million.
David may decide not to name himself as an income beneficiary for two reasons. First, if David is removed from the calculations, the math is essentially the same. Second, if David decides to retain income for his life, any increase in the assets of the PIF prior to his death will generate additional estate and generation-skipping taxes.
By transferring his stock to a PIF, David has moved $10 million out of his taxable estate at a net tax cost of ZERO (income tax savings, less gift and GST taxes), he gives an asset worth at least $9 million to his heirs, AND he avoids potential capital gains tax of $3.1 million.
Note the total return PIF is not limited to earned income distributions. All dividends, interest, rents, royalties, and short-term capital gain are paid out. A portion of the net realized long-term capital gains may also be distributed. By using a PIF to sell appreciated stock, David makes a substantial charitable contribution to his church, avoids capital gains taxes and future estate taxes, and transfers a significant legacy to the next two generations while ensuring a steady and dependable income stream for the rest of his life.
The desire to transfer your wealth to your children and grandchildren is natural and normal. But your desire to leave a charitable gift to your church is supernatural! It’s supernatural in the sense that you can impact lives beyond the limited boundaries of bloodlines in a way that is not limited by generations or geography.
Your church recognizes your natural and supernatural desires and is equipped to provide you with the expertise you need to make both of these desires become reality. Through wise planning you can create additional income, leave an inheritance to your children, reduce your tax liability, and leave a charitable gift to your church to carry its mission and vision into the future.
Your financial wealth, regardless of size, can be servant to each desire God has placed in your heart. Like Abraham, you have been called to leave a legacy for the cause of Christ and the advancement of his Kingdom. You have been blessed so that you can be a blessing!
