A Pooled Charitable Trust: Do Good and Get Tax Breaks on a Budget
How to help charity while getting tax benefits for yourself.
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. However, thanks to the emergence of pooled trusts, you no longer have to set up your own charitable trust, and you can start off by contributing as little as $5,000 to $10,000.
For more information about charitable trusts, read the article The Charitable Trust: Do Good and Get Tax Breaks.
How Pooled Income Trusts Work
The charity sets up the trust. You don't set up your own pooled income trust; the charity or an investment company does that, 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.
You can make additional investments. 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 a period of years.
Types of contributions allowed. You can make a cash contribution or give the charity bonds or stocks, but not tax-exempt ones. Also, federal law prohibits gifts of tangible property -- such as real estate or jewelry -- to a pooled trust.
Tax Breaks and Dividends
Tax breaks. 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. These factors are used to estimate the size of the future payments.
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Income paid to you. The charity pays income to you (or the beneficiaries you've named) according to your contribution and the fund's earnings. The payments you receive are taxed as regular income. You can specify that your earnings be retained until you reach a certain age, such as a 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 additional gifts in varying amounts. 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 then.
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