LIFETrust Pooled Income Fund Questions and Answers
Following are frequently asked questions regarding pooled income funds, including with respect to the LifeTrust Pooled Income Fund. This information is general in nature and is not legal or tax advice.
For more information, refer to the pooled income fund disclosure statement. Also contact your own financial, legal and tax advisor as necessary to see if a LIFETrust pooled income fund contribution is right for you.
What is a pooled income fund (PIF)?
A pooled income fund (PIF) is a trust maintained by a public charity that pays lifetime income to individuals selected by the donor, with the remainder going to the public charity.
What are the additional advantages of a LIFETrust Pooled Income Fund?
Most PIFs are offered by a particular charity whose primary objective is to mostly benefit that charity. A LIFETrust pooled income fund is intended to provide more "balanced" benefits between the donor and the charity. The additional advantages of a LIFETrust pooled income fund are as follows:
- “Oversized” tax deductions through the use of “new” pooled income funds. (A new PIF – that is, a PIF that has been in existence for less than 3 taxable years- takes advantage of special IRS calculation rules that result in higher deductions where, as here, we are in a low interest rate environment.)
- Specialized PIF trust provisions and investment strategies that are intended to generate larger annual income payments
- The assets are invested to generate income that is taxed at more favorable rates.
- The donor may recommend that the charitable remainder be paid to one or more of the donor’s preferred public charity(ies), or to have a donor advised fund established on the donor’s behalf.
- The ability to contribute assets other than cash or marketable securities, if approved.
What are the main benefits of a traditional Pooled Income Fund?
The main benefits of a traditional PIF (such as a PIF established by a church or college) are as follows:
- An immediate income tax deduction equal to the estimated value of the charitable remainder value.
- The ability to contribute appreciated property without capital gains-related taxes or the related 3.8% net investment income tax. Traditional PIFs typically limit the types of appreciated asset they will accept to publicly traded securities.
- Lifetime income payments for designated income beneficiaries, who are usually limited (such as to the donor and his/her spouse).
- The ability to fulfill the donor’s long-term philanthropic objectives to the sponsoring charity.
- No ongoing compliance or tax filing requirements (making PIFs easier and less expensive to maintain compared to similar charitable giving strategies such as a charitable remainder trust).
How much larger is the deduction for a contribution to a LIFETrust pooled income fund, compared to a traditional (old) PIF or a charitable remainder trust?
Again, this depends on many factors. However, to illustrate, if a 2020 donation is made on behalf of a 60 year sole income beneficiary, it is reasonable to estimate that the deduction for a contribution to a LIFETrust pooled income fund will be approximately 30 percent larger than a deduction to an “old” PIF (one older than 3 taxable years earning 3.5%) and approximately 80% larger than as large as a contribution to a comparable charitable remainder unitrust. In fact, in cases where the income beneficiaries are very young, a charitable remainder trust may not even be allowed. A comparative illustration can be provided upon request.
What affects the amount of the PIF income deduction?
The primary factors in determining the PIF income deduction are the number of income beneficiaries, the age of the income beneficiaries, and the interest rate used to determine the value of the charitable remainder interest. Generally, the fewer and older the income beneficiaries, the larger the tax deduction. This is because it is more likely that there will be fewer income payments paid over a shorter period of time, resulting in the charity receiving its remainder faster. Conversely, the larger the number of income beneficiaries, and the younger the income beneficiaries, the smaller the tax deduction. This is because it is more likely that income payments will continue for a longer amount of time, resulting in the amount being paid to the charity being delayed or reduced. Also, in a low interest rate environment, new PIFs generate a substantially larger deduction, on account of the rules that are required to calculate the new PIF deduction.
Must a donor be a minimum or maximum age to establish a LIFETrust?
There is no minimum or maximum age for a donor to establish or fund a pooled income fund. In addition, a pooled income fund may be established at death. This may provide estate tax advantages, and provide legacy income to loved ones.
Are there limits on how much can be deducted with respect to a PIF contribution?
Yes. While there no actual limits regarding how much can be contributed to a PIF, there are limits on how much can be deducted. This is because the PIF contribution is partially a charitable contribution. Charitable contributions are subject to limits regarding how much can be deducted in one year (generally 60 percent of the donor’s adjusted gross income for cash contributions and 30% of AGI for property donations). Excess donations may be carried over and used over the next 5 years. Consult the PIF disclosure statement for more details or ask your tax advisor.
May a PIF contribution be revoked?
PIF contributions cannot be revoked, except by will. Accordingly, careful consideration should be given before making a PIF contribution.
Who may be a LIFETrust pooled income fund beneficiary?
LIFETrust pooled income fund income beneficiaries may include any living individual or a class of individuals. The donor selects the LIFETrust income beneficiary(ies), which may include the donor, the donor’s spouse, children and/or grandchildren, or any other individual. In fact, an exceptionally attractive LIFETrust pooled income fund opportunity is that contributions may be made to provide lifetime income for disadvantaged persons or those who just need a leg up. Make your wealth count by naming someone who could really use the income.
May PIF income beneficiaries be changed?
Generally, the designation of PIF income beneficiaries is irrevocable. The only exception is that the donor may reserve the right to revoke an individual income beneficiary by will. Thus, careful consideration should be made when deciding who should be a PIF income beneficiary.
How may PIF income beneficiaries be paid their share of the PIF income?
PIF income beneficiaries may be paid their share of the PIF income either consecutively, concurrently, or both consecutively and concurrently. The donor decides at the time the gift is made. If more than one PIF income beneficiary is entitled to a income payment (a concurrent payment), and one of the PIF income beneficiaries dies, then the deceased income beneficiary’s share will be allocated to the remaining concurrent income beneficiaries.
How is the PIF income taxed?
A PIF is not taxed on its income. Instead, PIF income is taxed on a “pass-through” basis to the PIF income beneficiaries. The PIF income retains the tax character associated with the income received. For example, interest is treated as ordinary income. Dividends that are treated as “qualified dividends” qualifies for favorable tax treatment. (LIFETrust pooled income funds are invested in a manner that intends to maximize income that is taxed favorably.)
The LIFETrust pooled income fund is designed to distribute short-term capital gains. Some LIFETrust pooled income funds allow long-term capital gains (other than long-term capital gains that existed at the time the property was computed) to either be paid as determined necessary or appropriate by the LIFETrust trustee, or retained in the trust to generate future income.
May the donor’s selection of the charity that will receive the remainder interest be changed?
As a formal matter, the charitable remainder must be paid to the public charity that sponsors the PIF. However, the donor may designate that the remainder be contributed by that public charity to one or more public charity that the donor requests, or to a donor advised fund. See the PIF disclosure statement for more details.
May a donor be the trustee of the LIFETrust?
No. This is not permitted by law.
What is the LIFETrust investment objective and how may LIFETrust assets be invested?
LIFETrust pooled income funds are invested with an objective of generating higher current income than a traditional PIF. Capital growth, while important, is not the primary objective. LIFETrust pooled income funds are also invested in a manner that results in favorable tax treatment, such as in stocks that generate qualified dividend income.
A PIF may invest in any except for tax-exempt securities, including mutual funds and similar entities designed to invest in tax-exempt securities. The LIFETrust pooled income fund also will not invest in assets that might jeopardize the PIF’s tax-preferred status such as certain real estate or that results in excise taxes to the PIF.
How frequently is LIFETrust pooled income fund income distributed?
LIFETrust pooled income fund income is required to be distributed annually. However, it is intended that income will be distributed more frequently, such as quarterly or monthly.
What is the minimum initial LIFETrust pooled income fund contribution? May additional contributions be made?
The minimum contribution to a LIFETrust pooled income fund is $20,000. Additional contributions also may be made. However, the deduction amount will be affected by whether the PIF is “new” (less than 3 years old) at the time of the contribution. We anticipate that there will always be a new PIF in existence, so that you may maximize your charitable contribution tax deduction.
Is there a charge for contributing to a LIFETrust pooled income fund?
There is no charge for contributing to a LIFETrust pooled income fund as such. However, Forward Giving, Inc. (FGI) will usually receive a corresponding contribution of 10% of the estimated tax benefit associated with the contribution. This corresponding contribution may be made by either reducing the PIF contribution, or by the donor making an additional contribution to FGI. The corresponding contribution is fully deductible (subject to charitable contribution deduction limitations). In addition, there will be a PIF structuring fee of 5% of the income generated by the PIF, which is paid from the PIF as and when income is distributed. These amounts may be reduced by FGI at its sole discretion. In complex situations, an additional charge may be required, e.g., to reimburse direct costs to FGI (e.g., for legal or professional fees).
Are IRS filings required for the LIFETrust pooled income fund?
Not for the donor. This provides a significant advantage over charitable remainder trusts or similar arrangements. All required filings are handled by the PIF.