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, see 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.
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.
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 Anja are married and nearing retirement age. They own 500 shares of stock that have gone way up in value -- from $10 to $100 a 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 a pooled charitable trust.
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 ($50,000) 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 because John and Anja held the stock for over a year. Jonathan and Anja's payments from the trust are based on the $50,000 sale proceeds, even though they didn't have to pay taxes on the $90 per share gain.
Where to Find a Pooled Trust
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 this option with you. You may want to look online first; many organizations have websites that describe their pooled trusts.
For a detailed discussion about including charitable trusts in your estate plan, read Plan Your Estate , by Denis Clifford (Nolo).