Due to low returns during the past several years, many pooled income funds have not been very popular with donors. Some charitable organizations have not had any new donors to pooled income funds in several years. Given the cost of administering the fund, these charities have considered the possibility of converting the pooled income fund to another gift plan.
Charitable Gift Annuity Conversion Option
While there is no specific provision for doing so in the Code, it may be possible to convert a pooled income fund into charitable gift annuities. If all donors agree, it could be possible that they would exchange their respective income interest in the pooled income fund for charitable gift annuities. In effect, they would be transferring irrevocably all of their income interest to the charity and receiving charitable gift annuities in return.
Since the income interest is a valid state law property right, there is no reason why they should not be permitted to make such a lawful transfer. While the federal tax consequences are not entirely clear, it is reasonable to claim that the property interest should be valued and then treated like other capital-gain-type property interests transferred in exchange for gift annuities. The income interests would be valued, and gift annuities issued for those amounts. The gain should be recognized over the life expectancy of the donor or donors. All of the gift annuities would need to qualify under federal rules by producing at least a minimum 10% additional charitable deduction. Sec. 514(c)(5).
In regulated states, it may be necessary to pay only the American Council on Gift Annuities rates on the income interest value. This could mean that pooled income fund beneficiaries will receive a lower income rate from the new gift annuity. However, they also would receive a charitable income tax deduction.
While this is a rather creative solution that may be permissible, counsel for charities contemplating this course of action should carefully examine the various tax ramifications of a PIF to CGA conversion.
Potential PIF - Higher Return Option
At one time, most trusts were invested in bond portfolios. The income recipient received ordinary income and the capital gains were allocated to principal. However, since stock returns during the past century have exceeded bond returns by 3% to 4%, trust portfolio managers have moved to portfolios with more stocks than bonds. In response to these economic changes, many states are now implementing Sec. 104 of the Uniform Principal and Income Act. This provision is consistent with total return principles and defines income as both ordinary income and a prorated allocation of capital gain.
Most pooled income funds are following investment principles appropriate for the year 1950. The PIF is almost entirely invested in bonds and fixed return securities. However, if the Treasury acknowledges the new definition of income as both ordinary income and a portion of recognized capital gain each year, then it may be possible to create a pooled income fund with payments similar to a straight unitrust. If this becomes possible, then the pooled income fund could invest in a 60% stocks/40% bonds fixed income portfolio similar to endowment investments of most charities. The payouts from this PIF would be very similar to those distributions from a charitable remainder unitrust or annuity trust.
