American Bar Association
Section of Taxation
Report to the ABA House of Delegates
POOLED INCOME FUNDS — UNITRUST INTEREST
- The pooled income fund is an important charitable giving vehicle for donors who wish to make a charitable gift while retaining or creating a life income interest but who do not possess sufficient financial resources to establish a charitable remainder unitrust or annuity trust.
- Because of the expense of maintaining a pooled income fund, small charities generally find it uneconomic to provide such vehicles for their smaller donors.
- The current statute and the related regulation require the creation of an income interest for the life of one or more beneficiaries who are living at the time of the transfer. Each such beneficiary receives income based on his proportionate share of the annual income earned by the fund. I.R.C. Section 642(c)(5) and Regulation § 1.642(c)-5(b).
- Since the payout is entirely dependent on the current interest and dividend income of the pooled income fund's assets, rather than the total appreciation of the assets, fund trustees usually invest heavily in bonds and other low-growth investments that generate ordinary income while avoiding investments in higher-growth stocks that pay little or no dividends.
- The current state of the law stunts the growth of assets in pooled income funds thereby hindering the ability of smaller donors and charities to realize the same kind of returns possible from charitable remainder trusts.
Purpose of "Income-Only Provision"
- At one time, the idea of limiting distributions to income only was considered the most prudent way to protect a charity's remainder interest in the fund. However, investment theory has evolved and economists now recognize that portfolios invested for total return are more likely, in the long run, to generate more for charitable remaindermen. In fact, while the current system preserves the principal of a pooled income fund in nominal terms, it does not necessarily preserve the fund's value in inflation-adjusted terms.
Purpose of the Proposed Revision
- The statutory requirements of pooled income funds should evolve to allow trustees to invest assets more prudently for total return. The Internal Revenue Code and corresponding Treasury Regulations should be amended to permit the creation of a unitrust interest in assets transferred to pooled income funds.