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Pooled Charitable Trusts: Tax Breaks for Small Fry

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Americans support more than a million nonprofit organizations--sometimes, you may feel that most of them have your phone number. Besides the many different causes to choose from, there are different ways to give your support. One increasingly popular way of helping out your pet cause is by donating to a " pooled" charitable trust.

Traditionally, the advantages of charitable trusts have been available only to the wealthy--people who can donate $100,000 or more and hire a lawyer to set up a trust. But thanks to the emergence of pooled trusts, you no longer have to set up your own charitable trust to make this type of donation, and you can start off by contributing as little as $5,000 to $10,000.

How Pooled Income Trusts Work

You don't set up your own pooled income trust; the charity or an investment company does that itself, and then accepts donations from anyone who wishes to give. All the donations are pooled into one big fund and then invested, much like a mutual fund. The fund then pays income to you, based on its return on investment.

After you make the minimum initial donation, many charities accept subsequent contributions in $1,000 increments. So if you don't have a large portfolio or cash to donate all at once, you can still build a good retirement income--and benefit a good cause--by donating smaller amounts over years.

You can make a cash contribution or give the charity bonds or stocks, but not tax-exempt ones. You cannot give tangible property such as real estate or jewelry to a pooled trust. It's not permitted under federal law.

Tax Breaks and Dividends

Every time you make a donation, you are entitled to take an income tax deduction. You can't deduct the whole amount of your donation; after all, you're getting income back from the charity. The exact amount of your deduction depends on the beneficiary's life expectancy--in other words, how long the beneficiary is likely to receive income--and the fund's recent yield used to estimate the size of the payments.

The charity pays income to you or the beneficiaries you've named according to your contribution and the fund's earnings. Commonly, payments are sent quarterly or semiannually. They are taxed as regular income. You can specify that your earnings be retained until you reach a certain age, such as retirement age of 65 or 70, with payments to start then.

Example: Yuki is in her 40s, with a salary of $80,000 a year. She wants to support her favorite museum and also plan for her retirement. Yuki contributes $10,000 to the museum's charitable pooled fund and takes an income tax deduction, the exact amount of which depends on her life expectancy and the fund's recent performance.

For 20 years, she makes gifts--more in high-income years and less in years when she has unexpected expenses. By age 65, when she needs the income, her pooled shares, having been well-managed in diversified investments, are worth around $400,000. She will receive the income this amount generates.

After your death, the charity receives your gift outright--and without probate. If it was invested wisely, chances are the charity's share will have significantly appreciated in value by them.

Capital Gains Exemption

By donating securities or other property that has increased in value to a pooled charitable trust, you in effect convert those assets into income-producing property--without paying capital gains tax. And if you owned the asset for at least a year before donating it, the trust will also be exempt from capital gains taxes when it sells the asset. This is why highly appreciated securities make an excellent gift to a pooled trust. The charity can sell them for their present market value and pay no capital gains tax. Since no tax is taken out, more money is left for the charity to invest--which means more income for you.

Example: Jonathan and his wife Anja are nearing retirement age. They own 500 shares of stock that have gone way up in value--from $20 to $200/share--but don't produce much income. They would like to sell the stock and invest the proceeds in income-producing assets, but doing so would mean paying a hefty capital gains tax. They decide, instead, to donate it to the pooled charitable trust of the American Foundation for the Blind.

When they donate the stock, they take a tax deduction for the value of their gift. That amount is calculated by starting with the market value of the stock ($100,000) and subtracting the value of the payments Jonathan and Anja can expect to receive during their lifetimes. The estimate of these payments is based on the pooled fund's recent investment performance and their life expectancy.

The charity takes the stock and sells it. As a tax-exempt charity, it does not owe any capital gains tax on assets that were held at least a year by the donor. Jonathan and Anja's payments from the trust are based on the $100,000 sale proceeds, even though they didn't have to pay taxes on the $180/share gain.

Most large charities--many universities and museums, for example--offer pooled income trusts. The charity's Planned Giving department will undoubtedly be delighted to discuss it with you. You may want to look online first; many organizations have Websites that describe their pooled trusts.

Copyright © 1999 Nolo.com, Inc.

Last updated: Oct 21, 1999




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