Pooled Income Fund

A pooled income fund is a charitable giving vehicle operated by a public charity, such as a university or hospital, that accepts irrevocable gifts of property from multiple donors, pools those assets into a single investment portfolio, and pays each donor or their designated beneficiaries a proportional share of the fund's actual income for life. When the donor dies, their share of the fund permanently transfers to the sponsoring charity. It operates similarly to a mutual fund, except that the ultimate beneficiary is the charity rather than the donor's estate.

Think of it as donating assets today that keep paying you income until you die, after which the remaining value goes to the charity.

How a Pooled Income Fund Works

The mechanics are straightforward. You contribute cash, securities, or other property to the fund. The charity pools your contribution with those of other donors into a single investment portfolio. Each year, the fund earns income through dividends, interest, and other distributions, and that income is distributed to all donors in proportion to their shares of the fund.

Your share of the annual income is determined by the units assigned to you at the time of your contribution, which is based on the value of your gift relative to the total fund. If the fund earns 4% annually and your gift represents 2% of total fund assets, you receive 2% of 4%, or 0.08% of total fund assets each year as income.

The Tax Benefits

Pooled income funds generate three simultaneous tax advantages.

• Charitable deduction at contribution: You receive an immediate income tax deduction for the present value of the remainder interest that will eventually pass to the charity. The deduction is calculated using Internal Revenue Service tables based on your age, the current federal discount rate, and the fund's historical payout rate.
• Capital gains deferral: If you contribute appreciated securities, you avoid immediate recognition of the capital gain at the time of contribution. The gain is instead spread over your lifetime as a portion of the income distributions you receive.
• Estate tax reduction: The contributed assets are removed from your estate permanently, reducing potential estate tax exposure while still providing lifetime income.

Pooled Income Fund vs. Charitable Remainder Trust

Both vehicles provide lifetime income and a charitable bequest, but they differ structurally. A charitable remainder trust is a separate legal entity established by the donor and managed by a trustee of the donor's choosing. It can hold any assets and pay either a fixed annuity amount or a fixed percentage of trust value annually. A pooled income fund is managed by the charity itself, which makes the operational burden zero for the donor.

The charitable remainder trust offers more flexibility in payout design and asset selection. The pooled income fund offers more simplicity and is typically accessible at lower minimum gift amounts, with many charities accepting contributions of $5,000 or less to enter an existing pool.

Who Uses Pooled Income Funds

Pooled income funds appeal most to donors who want to make a significant gift to a specific charity they already support, who hold appreciated securities they do not want to sell outright, and who want ongoing income without the administrative burden of establishing their own trust. Universities, hospitals, and large nonprofits that have operated pooled income funds for decades often have substantial pools that offer donors an established income track record.

Popularity has declined since the 2000s as low interest rates compressed fund income. Charitable remainder trusts and donor-advised funds have captured much of the market that pooled income funds previously served.

Sources

• https://www.irs.gov/pub/irs-pdf/p1231.pdf
• https://www.pgdc.com/pgdc/pooled-income-funds