e-PIF-any

e-PIF-any

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

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.

Thanks,

Randy Fox

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7520 Rates:  Aug 1.2% Jul 1.2.% Jun 1.2.%

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