Planning for a financial future and maximizing your gift in the present day is a complication that many people face. There are more types of trusts available to you than you might have thought possible, but a pooled income fund tends to stand out for its tax advantages, lifelong income, and charitable giving.
What could be better than all of those factors combined?
Before you sign on the dotted line and decide that a pooled income fund is the right type of trust for you and your beneficiaries, here’s what you need to know about how they work and how they compare to other trusts.
What is a Pooled Income Fund?
Understanding the intricacies and nuances of the different trust types available to you is key to selecting the right one for you to leave a financial legacy. A pooled income fund is one more way that you may give a greater gift to your beneficiaries via a charitable trust. But how do you know if a pooled income fund is the right move for your giving?
A pooled income fund is a charitable trust, but it is also a type of mutual fund. Many people band together to contribute their gifts in one big “pool” that gets invested together. As the investments gain traction and start to net a profit, the proceeds are distributed to the beneficiaries according to their percentage or share of the mutual fund.
During your lifetime, you might receive quarterly payments from the pooled income fund. After your death, those quarterly earnings can be transferred to a beneficiary of your choosing for life. All of the value of your contributions will then be attributed to your named beneficiaries.
When the beneficiary passes, the remainder of the funds in the pooled income fund will then be distributed to the designated charity.
Benefits of a Pooled Income Fund
Why should you choose a pooled income fund for your charitable giving and financial legacy? The good news is that this particular investment vehicle packs a powerful punch for your finances in the here and now, as well as into the future.
First and foremost, you can claim a tax deduction on your income taxes right away. Whether you decide to give cash or appreciated assets, you can deduct the fair market value of your gift in the current tax year based on your age and the fund’s rate of distribution. If you worry that your wealth will end up in the hands of Uncle Sam, this is a savvy investment vehicle.
Second, the assets donated to the trust are not considered a part of your estate any longer. This can be beneficial for your beneficiaries as it reduces the federal estate taxes that they will be hit with in the wake of their grief over your passing (assuming they are still grieving in nine months). It can also eliminate probate which is a long and often drawn-out process that stresses the family and ties up resources.
It is also important to mention here that you can avoid capital gains tax on your contributions to a pooled income fund. The result is that you can invest the full market value of the asset, which can lead to higher distributions on that investment.
Of course, there is also the benefit of knowing that your gift will make a difference for the charity you select. You will know that your wealth had the impact on the world that mattered to you most, along with setting up a recurring income stream for yourself or your beneficiaries.
Pooled Income Fund vs. Charitable Remainder Trust
The good news is that you have more than one option when it comes to investing for the future and making an impact on a charity. Both pooled income funds and charitable remainder trusts give you a financial advantage, but which one should you choose?
The first consideration is how much you intend to contribute to a trust. Charitable remainder trusts usually require a larger contribution because you are funding the trust entirely on your own as opposed to in concert with others in a pooled income fund. If you have a smaller gift to give, a pooled income fund might be the way to maximize your return on investment.
You should also consider how the tax deduction will work right away. A pooled income fund will have a deduction based on the fair market value of the gift, rate of distribution, age of the beneficiary, and number of beneficiaries. On the other hand, charitable remainder trusts are based on the term and specific type of trust for a more straightforward approach to saving taxes.
Another consideration is the impact you will make on the charity you select. Charitable remainder trusts require a minimum of ten percent of the value of the trust to be contributed to the charity. Otherwise, you may face steep penalties. A pooled income fund may require more money to be given once the beneficiary passes.
Strategize Your Options with the Experts at Magellan
Not sure whether a charitable remainder trust or a pooled income fund is the right fit for your financial legacy? Let the experts at Magellan help you make the decision that is the perfect fit. We offer comprehensive estate, financial, legal, and tax planning so that you can maximize your gift with charitable remainder trusts.
Reach out to us today to learn more about how we can help you plan for your financial future!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
This material provided by Kevin Meaders was written by Axle Eight, a non-affiliate of Magellan Planning Group and Cetera Advisor Networks LLC.