Tuesday April 23, 2024
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6.6.1 Pooled Income Funds
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Pooled Income Funds
Income Tax Deduction: A PIF donor receives a charitable income tax deduction for the present value of the remainder interest given to charity.
Rates of Return: A PIF must calculate the rate of return each year in order to determine the highest rate from the last three years to use for deduction purposes.
Charitable Income Tax Deduction: Reg. 1.642(c)-5(a)(4) outlines the method for determining the charitable deduction for a PIF.
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A pooled income fund (PIF) is similar to a charitable remainder trust in that a donor receives income for a lifetime and the remainder is given to charity. A unique aspect of a PIF is that it allows charities to combine or "pool" gifts. In other words, a charity may collectively invest gifts from pooled income fund donors.
Donors must transfer property with a remainder irrevocably committed to a Sec. 170(b)(1)(A) public charity. The gifted property must be commingled with that of other PIF donors. Tax-free funds may not be transferred to a PIF, nor are they a permissible investment for a PIF. A PIF must be maintained by the public charity that holds the remainder interest. In addition, a PIF donor or beneficiary cannot act as a trustee with management responsibility. Finally, each beneficiary must receive a prorated share of the PIF income annually. Sec. 642(c)(5).
A qualified PIF requires the donor to create an income interest for "the life of one or more beneficiaries, each of whom must be living at the time of the transfer." Reg. 1.642(c)-5(b)(2). A PIF may be created for two, three, four or even more measuring lives. Unlike a charitable remainder trust, a PIF is not subject to the 10% minimum interest test. Furthermore, a PIF may include a class of beneficiaries, as long as there is no power to allocate among the class and all beneficiaries are alive and ascertainable at the time of the PIF creation.
Income Tax Deduction
A PIF donor receives a charitable income tax deduction for the present value of the remainder interest given to charity. The deduction is based on the highest rate of return for the prior three years.
Rates of Return
A PIF must calculate the rate of return each year in order to determine the highest rate from the last three years to use for deduction purposes. If a PIF has not been in existence for three taxable years, then the PIF must use an averaged and rounded rate. The rate of return is usually available from the PIF administrator.
New Funds or Funds in Existence Less than Three Years
New funds and those in existence less than three years must use the rate of return corresponding to the year the PIF is written, using the table below (produced using the formula from Reg. 1.642(c)-6(e)(4)). The table is created by adding together the applicable federal rates (AFRs) from the last 12 months and dividing by 12, then subtracting 1 and rounding to the nearest 0.2%. Finally, the highest rate from the last three years is selected and used as the return rate for the current year.
| Date Fund Created | Return Rate |
| May 1 to Dec. 31, 1989 | 9.4% |
| Jan. 1 to Dec. 31, 1990 | 9.8% |
| Jan. 1 to Dec. 31, 1991 | 9.8% |
| Jan. 1 to Dec. 31, 1992 | 9.8% |
| Jan. 1 to Dec. 31, 1993 | 9.4% |
| Jan. 1 to Dec. 31, 1994 | 8.4% |
| Jan. 1 to Dec. 31, 1995 | 6.8% |
| Jan. 1 to Dec. 31, 1996 | 7.2% |
| Jan. 1 to Dec. 31, 1997 | 7.2% |
| Jan. 1 to Dec. 31, 1998 | 7.2% |
| Jan. 1 to Dec. 31, 1999 | 6.8% |
| Jan. 1 to Dec. 31, 2000 | 6.8% |
| Jan. 1 to Dec. 31, 2001 | 6.6% |
| Jan. 1 to Dec. 31, 2002 | 6.6% |
| Jan. 1 to Dec. 31, 2003 | 6.6% |
| Jan. 1 to Dec. 31, 2004 | 4.8% |
| Jan. 1 to Dec. 31, 2005 | 4.0% |
| Jan. 1 to Dec. 31, 2006 | 3.8% |
| Jan. 1 to Dec. 31, 2007 | 4.8% |
| Jan. 1 to Dec. 31, 2008 | 4.8% |
| Jan. 1 to Dec. 31, 2009 | 4.8% |
| Jan. 1 to Dec. 31, 2010 | 4.6% |
| Jan. 1 to Dec. 31, 2011 | 2.8% |
| Jan. 1 to Dec. 31, 2012 | 1.8% |
| Jan. 1 to Dec. 31, 2013 | 1.8% |
| Jan. 1 to Dec. 31, 2014 | 1.4% |
| Jan. 1 to Dec. 31, 2015 | 1.2% |
| Jan. 1 to Dec. 31, 2016 | 1.2% |
| Jan. 1 to Dec. 31, 2017 | 1.2% |
| Jan. 1 to Dec. 31, 2018 | 1.4% |
| Jan. 1 to Dec. 31, 2019 | 2.2% |
| Jan. 1 to Dec. 31, 2020 | 2.2% |
| Jan. 1 to Dec. 31, 2021 | 2.2% |
| Jan. 1 to Dec. 31, 2022 | 1.6% |
| Jan. 1 to Dec. 31, 2023 | 2.2% |
| Jan. 1 to Dec. 31, 2024 | 3.8% |
Funds in Existence for Three or More Taxable Years
A fund that has been in existence for three or more years simply uses the highest rate of return from its last three taxable years.
Charitable Income Tax Deduction
Reg. 1.642(c)-5(a)(4) outlines the method for determining the charitable deduction for a PIF. The fair market value of the contributed property, the beneficiary's age and the highest rate of return for the prior three years are needed to perform the deduction calculation.
While Crescendo incorporates information from IRS Pub. 1457 in its software, it is helpful for gift planners to know how the deduction calculation would be performed if they have to look up all factors. To illustrate this, consider Jane Donor who gifts $100,000 to her favorite charity's PIF on June 1, 2018. Jane is 68 years old. The PIF has been in existence since 2015. Therefore, the rate of return for the PIF must be calculated. The rate of return in 2015 was 4.6%, 2016 was 2.8% and 2017 was 1.8%. Thus, the highest rate in the preceding three years was 4.6%. Using this information and Pub. 1457, Table S, the charity's gift planner creates the following charitable deduction worksheet.
| Pooled Income Fund |
| One Life |
| Donor: |
Jane Donor |
Gift Amount: |
$100,000 |
Gift Date: |
01/01/2018 |
| First Person: |
Jane Donor |
Birth Date: |
01/01/1950 |
Age*: |
68 |
| * Age rounded to Nearest birthday. |
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(A) Highest Yearly Rate of Return
During Past Three Years: |
4.60% |
(A) |
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| (Reg. 1.642(c)-(6)(c)) |
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| (B) Nearest Table Rate Below (A): |
4.40% |
(B) |
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| (C) Factor at Line (B) Rate |
0.54196 |
(C) |
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| (IRS Pub. 1457, Table S) |
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| (D) Nearest Table Rate Above (B) |
4.60% |
(D) |
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| (E) Factor at Line (D) Rate |
0.52885 |
(E) |
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| (IRS Pub. 1457, Table S) |
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| (F) Line (C) Minus Line (E) |
0.01311 |
(F) |
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| (G) Line (A) Minus Line (B) |
0.20% |
(G) |
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| (H) Line (G) Divided by 0.20% |
1.00000 |
(H) |
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| (I) Line (F) Times Line (H) |
0.01311 |
(I) |
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| (J) Line (C) Minus Line (I) |
0.52885 |
(J) |
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(K) Line (J) Times Gift Amount
Present Value of Remainder Interest |
$52,885.00 |
(K) |
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(L) Line (K) Times
Tax Bracket and Savings 24.00% |
$12,692.40 |
(L) |
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| Projected Income to Family |
$57,072 |
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The charitable deduction worksheet includes the donor's name, the gift amount, gift date and the beneficiary's name, birth date and age.
(A) The highest rate of return for the prior three years must be entered to calculate the charitable deduction. Here, the highest rate of return for the past three taxable years (2015, 2016 and 2017) is 4.6%.
(B) The remainder percentage for a single life is found in Pub. 1457, Table S. The IRS chart in Table S shows only 0.2% increments. Table S lists a chart for 4.4% (because it is divisible by 0.2%). Next, locate the nearest table rate below 4.6% in Table S. The nearest rate below 4.6% is 4.4%.
(C) Using the chart corresponding to the 4.4% rate of return, find Jane's age (68) in the left column of the appropriate chart and travel across the row to the remainder column. The corresponding number is the remainder factor (0.54196).
(D) The remainder percentage for a single life is found in Pub. 1457, Table S. The IRS only publishes a chart in Table S for each 0.2%. Table S lists a chart for 4.6% (because it is divisible by 0.2%). Next, locate the nearest table rate above 4.6% in Table S. The nearest rate above 4.6% is 4.6%.
(E) Once the nearest rate above has been found (4.6%), find Jane's age (68) in the left column of the appropriate chart and travel across the row to the remainder column. The corresponding number is the remainder factor (0.52885).
Next, the interpolation between 4.4% and 4.6% must be determined. Lines (F) through (J) compute the interpolation for the 4.6% rate.
(F) The factor for the 4.6% rate (0.52885) is subtracted from the factor for the 4.4% rate (0.54196) to produce 0.01311. In short, Line (E) is subtracted from Line (C).
(G) Next, the 4.4% nearest table rate below is subtracted from the 4.6% highest yearly rate of return shown in Line (D) to give the range between the two rates of 0.2%.
(H) Because Table shows rates only at 0.2% intervals, Line (G), or 0.2%, is divided by 0.2% to produce the factor differential percentage of 1.00000.
(I) To find the interpolation result, Line (F) (0.01311) is multiplied by Line (H) (1.0000). The result is 0.01311.
(J) Subtracting the interpolation result of 0.01311 shown in Line (I) from the factor from the factor of the nearest rate below shown in Line (B) produces an IRS deduction factor of 0.52885.
(K) The present value of the remainder interest can then be calculated by multiplying the IRS deduction factor of 0.52885 by the $100,000 gift amount. The resulting present value, or today's value of the income stream to Jane based on the projected duration of the trust, is $52,885.
(L) Finally, the tax savings is calculated by multiplying the $52,885 present value of the remainder interest by Jane's tax bracket (24%). Thus, Jane will receive a charitable deduction for $12,692.40 in the year she creates the trust.
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Private Letter Rulings
PLR
200608002 PIF Qualifies with Additional Provisions:
X is a tax-exempt organization under Sec. 107(b)(1)(A)(iii) of the Code. X proposed to create a pooled income fund (PIF) that will qualify under Sec. 642(c)(5). After drafting the proposed fund document, X sought a Letter Ruling from the Service concerning several points. The PIF did comply with the sample PIF provisions published in Rev. Proc. 88-53. However, it also contained additional provisions not addressed in the sample language.
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