What is a Pooled Income Fund?

What is a Pooled Income Fund? And if it's been around for so long, why were you never invited to the pool party? The Pooled Income Fund is the most underappreciated tool in the world of charitable giving for donors and financial advisors, and I just want to make sure you don’t keep missing out. This is not a deep dive. This is an intro, a warm wave "have you and PIF met yet?" Because you deserve a fresh introduction to the giving vehicle that has been quietly doing remarkable things for donors, financial advisors and charities for almost 60 years now. 

How was the Pooled Income Fund Born?  

Time warp with me to 1969. Nixon was President, the moon landing was just a thing, and Congress passed the Tax Reform Act of 1969. This act turned out to be one of the most consequential pieces of legislation in charitable giving history. But imo the most exciting part was that it birthed something entirely new. Now, for the first and only time, a life income giving vehicle that only public charities could establish was born. They gave it the very clunky name,  

Pooled Income Fund, and it lives at IRC Section 642(c)(5). 

From the start, Pooled Income Funds had to compete with its two well-known siblings, Charitable Remainder Trusts and Charitable Gift Annuities. Charitable Gift Annuities offered older donors high fixed payouts that were partly tax-free during their life expectancy and that kind of math is easy to understand and predictable. Charitable Remainder Trusts gave donors some diverse and customizable planning options. Seems easy so everyone just ignored the poor Pooled Income Fund even though once you get to know it, it is very giving and very financially elegant.  

Fast forward to 1999 and The National Conference on Planned Giving created a presentation on how to terminate a Pooled Income Fund. They turned it into an article they now like to circulate to paid members a few times a year, for the past fourteen years. As we are learning, the Pooled Income Fund is not a kiddie pool and like every pool you must know how to maintain it to enjoy it. So, despite some industry confusion, Pooled Income Funds are thriving and have obvious staying power so let’s keep dipping our toes in.  

What Should I Know About The Pooled Income Fund? 

Rather than a fixed payout, the Pooled Income Fund offers variable income to the donor with the potential for growth. Wait, the pool continues to get deeper over time? Yes, and rather than a partial tax exclusion, it delivers its tax advantage upfront in the form of an immediate charitable deduction which can be carried forward for up to six years. The Pooled Income Fund is a deeper dive that rewards donors and advisors who are willing to get in together and really look around. At Alliance Community Foundation, we like to say we are “bias to yes” so we encourage donors to bring their own qualified financial advisor into the waters with them, meaning the donor’s financial advisor can manage the assets donated into the Pooled Income Fund, whether donated assets are to be managed for growth or not, is up to the donor. When we say “bias to yes” we also mean yes when it comes to donated assets. In fact, if assets are a little outside the ordinary, we're swimming in familiar waters. Alliance Community Foundation welcomes all legally permissible donated assets. In fact, our Pool Income Funds exist to make charitable giving creative, impactful, and easy for donors even when donating complex assets.

What is a Pooled Income Fund and How Does it Work? 

A Pooled Income Fund is a charitable trust maintained by a public charity, as described under IRC Section 170(b)(1)(a), into which donors make irrevocable contributions that are commingled and invested together. In plain language, it is like a mutual fund with a charitable heart and purpose. The IRS Code defines it under IRC Section 642(c)(5), with specific pool rules or requirements: it must be established and maintained by a public charity, it cannot invest in tax-exempt securities, and the donor cannot serve as trustee.  

In exchange of the gift to the Pooled Income Fund hosted by the charity, the donor receives units of participation, think of them like shares, based on the value of the contribution relative to the current value of the fund. We can pretend they are the floaties in the pool. Those assets are then managed by the donor's financial advisor. The Pooled Income Funds entire net investment income is distributed to income beneficiaries based on the number of units they hold, typically on a quarterly basis.  

Under IRC Section 642(c)(5)(a), the donor can name themselves, a spouse, a child, a grandchild, or any other living individual as an income beneficiary, as long as that person is alive at the time the gift is made. And when the last income beneficiary named by a donor passes away, the value of that donor's units is severed from the fund and transferred to the charity. The floaties float on to the charity.  

So, to wrap it up with a brief tour of the Pooled Income Fund. There is the donor, who makes the gift and chooses the income beneficiary(s) who receive income for life. And there is the charity, which maintains the fund and ultimately receives the remainder when the income interest ends. Income interests can run concurrently, meaning two or more beneficiaries share income at the same time, or consecutively, meaning one beneficiary's interest begins after another's ends. Charitable Gift Annuities and Charitable Remainder Trusts simply were not designed for that kind of income growth and multigenerational giving. 

The Perks: Why Have a Pooled Income Fund? 

First perk, the donor receives an immediate charitable income tax deduction based on the present value of the remainder interest going to charity. This deduction is calculated using IRS tables and the age of the income beneficiary, and it can be genuinely significant. Alliance Community Foundation has a Pooled Income Fund Calculator on their website exactly for this purpose. Go play around with it! 

Second perk, there is no capital gains tax on appreciated assets during the initial contribution. If a donor has held stock for thirty years and it has grown considerably, transferring it to a Pooled Income Fund sidesteps the capital gains tax that a straight sale would trigger. Did you ever imagine not having to pay taxes on all those juicy stock earnings? This is how you do it AND give to charity in a legacy way at the same time. So, we are technically at three perks. 

Fourth, the income is variable and has the potential to grow over time as the fund performs well. That’s why Alliance Community Foundation encourages qualified financial advisors to manage assets in the Pooled Income Fund. That's a win win so, five perks. Sixth, the flexibility in naming beneficiaries is a big deal. A donor can name themselves, a spouse, a child, or another individual to receive income, making it a flexible planning tool that can serve multiple generations or not. Since generational perks have been brought up, I cannot go on quantifying the Pooled Income Fund perks. However, I will wrap it up with one more, there is what the technical folks call double tax leverage, meaning the donor avoids recognizing capital gain on the initial contribution and receives a charitable income tax deduction at the same time.  

OK But Why Don't More People Have a Pooled Income Fund? 

What is a Pooled Income Fund to most donors and even some charitably savvy financial advisors? Honestly, the deep end, the unknown. And that is part of the problem. Let's start with the name. "Pooled Income Fund" sounds like something that requires a law degree or a lifeguard to understand, but if you’ve read this far you already know way more about it than you think you do. And Pooled Income Fund does not exactly roll off the tongue. We call it a PIF which is more fun to say.  

Then there is the variability question. Charitable Gift Annuities lock in a fixed payment for life. Charitable Remainder Trusts have their own relationship with the market but still offer more predictable payout structures. A Pooled Income Fund distributions flow with the market. For donors who crave certainty, that can feel uncomfortable. Finally, and to be straightforward about this: a Pooled Income Fund is open to everyone, however, the tax and income benefits truly come alive at the million dollar and up level. It is as simple as the bigger the gift, the bigger the benefits. 

Maximizing It: The Deep End of the Pooled Income Fund and Charitable Impact 

At its most powerful the Pooled Income Fund is a giving vehicle that rewards patience but still gives those quarterly income perks so one doesn't have to be too patient. Because the income a beneficiary receives is tied to the fund's performance, a well-managed fund by a financial advisor has the potential to generate big growth for income over time. That means not only income for the beneficiary can grow over time so does the eventual charitable gift. 

This is the long game brilliance of the pooled income fund. It is not just a gift. It is a gift that keeps working day and night while the donor gets to just float. 

How Long Can You Swim? Generational Reach 

Because Pooled Income Funds are measured by lives rather than years, they have an organic lifespan. A donor can name their daughter and her newborn as beneficiaries, which means the Pooled Income Fund's income stream could stretch across decades. Alliance Community Foundations longest-running Pooled Income Fund is estimated to be active for roughly 80 years. 

When the last income beneficiary passes away, the trustee severs the remaining value of that donor's units from the fund and transfers it to the charity. There is no drama, no legal wrangling, no arbitrary waiting periods or stacks of paperwork, no uncertainty about where the money goes. The charity receives the remainder and puts it to work for the mission the donor believed in. Alliance Community Foundation offers a Donor Advised Fund among several other charitable disposition opportunities for a Pooled Income Fund.  

You Are Cordially Invited To The Pool 

So, since this party has been kicking it since 1969, and you’ve already dipped your toes in, it’s time to finally see what it’s all about. Obviously the PIF has stood the test of time, outlasted the skeptics, and today continues to thrive generationally. The Pooled Income Fund provides income, a tax deduction strategy, a charitable gift, and a legacy, all wrapped up in a sophisticated charitable vehicle that even allows the donors financial advisor to keep the pool party popping. Ready to dive in?