Pooled Income Fund

When you contribute to the pooled income fund for United Way, you receive an income for the rest of your life, as well as a current income tax deduction. If you give low-yield appreciated securities, you may actually increase your income and avoid capital gains taxes. In summary, you make a meaningful gift to UW—a gift that also gives back to you.
Ultimately, your gift becomes our property, which we can use to further our important work. A pooled income fund gift is a perfect way to strengthen your financial future and ours, too.

Shared Earnings
The concept of a pooled income fund is simple. A pooled income fund commingles gifts from many donors for investment purposes, sharing the net earnings proportionately among them. In many respects, it is similar to a mutual fund.

Example: John contributes $10,000 to a pooled income fund. Assume his participation represents 1 percent of the fund. If the fund's net annual earnings are $75,000, John becomes entitled to 1 percent of $75,000, or $750.

When you include a pooled income fund gift as an itemized deduction on your federal tax return in the year of the gift, you also benefit from significant tax savings.

Your Role

You can give cash or securities, except those that are tax-exempt, to our pooled income fund. Your gift is irrevocable, but we agree to pay you an income for the rest of your life.
If you wish, you can name one or more survivors—your spouse, parent or anyone else—to receive a life income, too.
You benefit even more when you donate appreciated securities, as no gain is taxable to you. The pooled income fund does not pay capital gains tax either when it sells securities held long-term.

Example: Janet owns stock worth $10,000 today, which she bought many years ago for $3,000. Instead of selling her shares and realizing a taxable gain of $7,000, she gives the stock to our pooled income fund. Neither she nor the fund incurs any long-term capital gain, even though the stock is sold and the proceeds are invested in other securities.

Increase Your Income
Through a gift of low-yield investments to a pooled income fund, many individuals have dramatically increased their income. When the interest you receive on money market funds and certificates of deposit barely keeps up with inflation, or your growth stocks pay dividends of less than 3 percent, this may be the opportunity you've been seeking.

Example: Fred, age 64, owns long-term stock with a market value of $50,000 and a cost basis of $20,000, for a gain of $30,000 (net of brokerage commissions). It pays a dividend of only 2 percent, amounting to $1,000 a year. His federal income tax bracket is 28 percent.

Fred is unhappy with the small dividend he's getting, but if he sells the stock for reinvestment, he must pay a tax at 15 percent on the entire $30,000. Fred will lose $4,500 to taxes (15 percent of $30,000). Then he would have a net amount of only $45,500 to invest ($50,000 less $4,500). Assuming he purchased an investment yielding 5 percent, he would receive $2,275 annually. Compared to the dividend of $1,000 he received before, he would increase his income by 228 percent.

While that looks pretty good, Fred learns he can do a lot better by making a pooled income fund gift. So he contributes his $50,000 worth of stock to our pooled income fund, which is also yielding 5 percent. Since the fund pays no tax on long-term capital gains, the entire $50,000 is available to generate income for him. Already he has increased his income from $1,000 to $2,500 annually, an increase of 250 percent.

There is more. Fred will also receive an income tax charitable deduction of $22,947 in the year of his gift, saving him $6,425 of income tax (28 percent of $22,947). The savings of $6,425, invested at 5 percent, yields an additional $321. This means Fred's total new income resulting from his gift is $2,821 ($2,500 plus $321), an increase of 282 percent.

In addition, Fred has the satisfaction of knowing that after his lifetime, his gift will benefit a cause in which he believes deeply.

The Tax Implications

Assuming you itemize, you are allowed to take a sizable charitable deduction when you make a gift to our pooled income fund, even though we can't use the principal while someone, such as you or another beneficiary, is receiving an income.

The value of your deduction depends on your age and the age of any other beneficiary, as well as the rate of return earned by the fund in recent years. Official U.S. Treasury tables establish the amount by discounting the value of each life interest. If you are the sole beneficiary, your charitable deduction will be substantially larger.

When you contribute cash to the fund, you can deduct the value of your gift up to 50 percent of your adjusted gross income the same year. The excess is deductible over the next five years using the same formula. For a gift of long-term appreciated property, the annual ceiling on deductibility is 30 percent of your adjusted gross income, but you still have five years to carry over and use any excess deduction. In certain circumstances you can elect the 50 percent rule.

For income tax purposes, your income from the pooled income fund is taxable as ordinary income, which is 100 percent taxable.

For estate tax purposes, if a husband and wife are the only beneficiaries, the full value of the gift is removed from their taxable estates.

Long-standing public policy recognizes the value of tax incentives as a desirable way of encouraging individuals to assist charitable organizations. The government knows that most of the support for such institutions comes from private sources rather than tax revenues.

Your Questions Answered

Intrigued by what you have read so far? We hope so, but let's assume you have questions.

For example:

Q. What size gift is possible?

A. That is up to you. There is no fixed size, and gifts vary widely in amount. We would be glad to tell you our modest current minimum; donors rarely find it a problem. In fact, this kind of plan is especially desirable if you choose not to give the substantially larger amount recommended for a separate charitable remainder trust.

Q. How much income will I receive?

A. Your gift will be invested along with other contributions to the combined fund, and you will receive your share of the net earnings each year. The fund is invested prudently, seeking both an attractive return and safety of principal. You benefit from an increased return on the assets you contribute because of the tax deduction your gift generates. If you give low-yielding securities to the fund, you can increase your income even more. We would be pleased to quote the fund's recent yield.

Q. Will the income I receive vary from year to year?

A. Yes. The fund's earnings depend on its investment results. While high income is always an important goal, changing economic conditions affect the fund's return. However, its size and diversification assure comparative stability.

Q. Who makes the investment decisions?

A. Our pooled income fund is managed by investment specialists known for their experience, competence and integrity. We closely monitor their performance.

Q. Does the fund offer any other investment advantages I can't achieve by myself?

A. Managing your own money demands your constant attention. By contributing to our fund, you lessen that chore; and if you name another family member as beneficiary, you assure professional management for that person's greater security.

Q. If I decide to provide for another beneficiary besides myself, will the income decrease?

A. No. Whether you alone receive the income or someone you name receives income after your lifetime, the income paid each year will be the earnings on your gift to the pooled fund. Of course, if you name someone to receive income simultaneously, they would share in the earnings from your gift to the pooled fund, reducing the amount you would receive. The annual income payments are not affected by the ages of the beneficiaries either. However, the charitable deduction will be less for a two-life contract, because we must wait longer to benefit from your contribution.

Q. May I add to the fund later? A. Yes. Many donors take advantage of this option.

Reap the Benefits
When you invest in our pooled income fund, you participate in one of the most appealing arrangements used in planned giving. It allows you to make a significant gift to us while protecting your own need for income.

A pooled income fund makes possible a broader diversification of investments than a portfolio limited to your own holdings. The size of the fund also enables you to benefit from expert investment management. Our goal is to earn as high an income as is reasonable, consistent with the safety of the fund's principal.

Note the other benefits of our pooled income fund:

You acquire an assured source of income for life.

You can name another person as successor beneficiary.

You have the choice of determining the size of your initial gift and making additions later.

You are entitled to an immediate income tax charitable deduction.

You do not incur a taxable gain when you transfer long-term appreciated assets to the fund.

You can increase your return on the assets invested in the fund because of your tax deduction.

You can substantially reduce potential estate taxes.

Beyond the personal financial benefits you enjoy, you gain the satisfaction of supporting a cause that means a great deal to you; and there is the possibility that, over time, the value of your gift will grow, eventually increasing your contribution to our work.

The Personal Advantages
A gift to our pooled income fund will enable you to make a worthy contribution to us while maintaining or even increasing your own income. Your generosity will be rewarded by securing both your future and ours.

We would be happy to explain the specific financial benefits of our pooled income fund. Please contact Linda Heberer, Director of Planned Giving and Major Gifts, at (540) 777-4210 or linda@uwrv.org for more information.

The information on this site is not intended as legal, tax or investment advice. For such advice, please consult an attorney, tax professional or investment professional.