Article posted in Pooled Income Fund on 24 March 2015| 4 comments
audience: National Publication | last updated: 24 March 2015


Pooled Income Funds (PIF) have been around for a long time and, until recently, fallen out of favor. Perhaps because interest and dividend rates have been at historical lows for several years and because most PIFs were established some years ago, the combination of low return and low tax deduction reduced the broad appeal. Recently, though, the tide seems to have turned, with savvy practitioners establishing new funds to take advantage of current low AFRs.

Under IRS regulations, a PIF’s charitable income tax deduction is normally computed using a complicated formula based on the prior three years’ highest rate of return on the assets in the PIF. Older PIFs yield relatively low tax deductions and, with the flexibility and control available in the Charitable Remainder Trust world, there’d be no really good reason to compromise and utilize a PIF. Until now.

The IRS regulations tells planners: “If a pooled income fund has existed for less than three taxable years immediately preceding the year in which a transfer is made, the highest rate of return is determined by first calculating the average annual Applicable Federal Midterm Rate (as described in IRC §7520 and rounded to the nearest 2/10ths) for each of the three taxable years preceding the year of the transfer. The highest annual rate is then reduced by one percent to produce the applicable rate.” With recent rates extremely low, income tax deductions are being pushed proportionately higher (see examples below).  While giving to charity is not normally motivated by the income tax deduction, it doesn’t hurt to have a larger deduction.

Further, recent opinions about what constitutes “pooling” for the sake of qualifying for PIF status has led several commentators to agree that “more than one” life is enough. What that means is that a new PIF can be established for a husband and wife or a family and still qualify. Why would a charity do this for one family? Good question. As it happens, though, there are several, donor friendly and advisor friendly organizations that see a tremendous opportunity.  Donors want more flexibility and control as shown by many recent surveys and proven by the explosive growth of Donor Advised Funds (DAFs). However, DAFs don’t return any income to the donor. CRTs allow the donor to receive income but often fail the 10% remainder test because of the donors’ ages. Including children is almost always out of the question. PIFs stand somewhere in the middle; they return income, they have no 10% remainder qualification which allows a multi-generational income opportunity and they provide a sizable tax deduction.

While income in a PIF is often limited to “rents, royalties, dividends and interest”, typical charitable trust accounting definitions of income, there is a recent school of thought that posits that some “post gift gain” may be counted as income as well. Certainly short term gain should not be an issue and some trustees may be willing to allow a portion (usually less than 50%) of long term gain to be allocated to income. This should do much to stabilize or normalize cash flows and make the PIF seem more like a CRT.

While there is probably more cost in establishing a single family PIF than a CRT, it may well be worth considering, depending on the size of the gift and other family considerations. Certainly advisors must become more knowledgeable and aware of the options to better advise the clients.

Click to download the PDF and print it out.


Randy Fox

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Re: e-PIF-any

Cute name. The resurgence of PIFs has a lot to do with the "new" regulations on definition of income from 2004. While there are open questions in this strategy, please look at Reg. sec.1.642(c)-5(a)(5)(i), the definition of income for a PIF. "...income generally may not include any long-term capital gains." However, it goes on to say that where the state law has a power to adjust between income and principal to fulfill the trustee's duty of impartiality, some portion of the total return may be allocated to income. But, in exercising that power, the trustee must allocate to principal and not to income, proceeds of from a sale or exchange of contributed or purchased assets at least to the extent of the fair market value on the date or contribution or purchase, Russ Howes of University of Wisconsin Foundation and I went to IRS in DC in 2002 or 2003 to argue this very issue, only to lose and withdraw the ruling request. Interestingly, the IRS came out with this regulation effective Jan. 2, 2004. Too late to help UW's existing PIF until the 2004 tax year. The reg applies to tax years 2004 and after. Can an existing PIF amend its governing document to take advantage? Each document is a must read to get that answer.

Re: e-PIF-any


Leave it to you to provide cogent context for this article. Thanks, as always, for your insights

Re: e-PIF-any

So... if the donor and family can receive income and there's no remainder test, what's in it to protect the charity's remainder interest? (I'm not referring to the commercial "charitable gift funds," as the management fees along the way are what's in it for them.)

Re: e-PIF-any

Remember, only income can be distributed. That leaves the principal in tact

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