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How to Feel Great While on a Budget - Pooled Charitable Trusts

In the past, it was only the wealthy that could take advantage of the tax breaks derived from charitable trusts. This was because it would take over $100,000 to hire an attorney and start such a trust. By pooling money among a group of people, however, you can set up your own charitable trust for very little - often with starting costs between $5,000 and $10,000.

Pooled Trusts -- How it Happens

The benefiting charity sets up the trust: 

One of the great parts about pooled charitable trusts is that the charity itself, or an investment company, sets up the trust and is responsible for accepting donations from those who wish to give. Much like a mutual fund, these investments are then pooled together and invested in the stock market. When the fund gets sufficient returns back on the investment, that money is paid out to you.

There's no need to stop giving: 

Once you meet the minimum donation amount which is set by the charity, you may continue to make additional donations to the fund. This is great for people who do not have large amounts of cash or a large investment portfolio. Many people use pooled charitable trusts as an alternate means for income during their retirement, just by donating small amounts to the trust over the years.

What can be donated to a pooled charitable trust?

In addition to the normal donations of cash, you can also donate stocks and bonds to such trusts, so long as there are not tax-exempt ones. However, tangible property such as cars and real property are not allowed to be donated.

Tax Incentives and Income

You can reduce your taxes!

Each time you donate to a pooled charitable trust, you may take an income tax deduction. However, you cannot deduct the full amount you donated to the trust. You must keep in mind that you are deriving an income from the trust. The amount that you are allowed to deduct will depend on how long the beneficiary is expected to receive income, as well as the yield of the fund. Factors like these are considered when the fund is determining future payments.

You also get income!

The charity is required to pay you or the beneficiaries you have named in an amount determined by the value of your total contribution as well as the fund's yearly earnings. This income will be taxed just like normal income, but these payments can be deferred. For instance, many people who have contributed to pooled charitable trusts elect to defer all payments until they reach 65 or 70 in order to have additional income during their retirement.

This can all be show clearly by using an example. Suppose John has worked hard in his company over the past 20 years and is now making $100,000 a year. John owes much of this success in his job to being able to relax in his favorite park, so he decides to donate $10,000 to the park's pooled charitable trust. John will be able to deduct a portion of this $10,000 from his income taxes depending on his life expectancy as well as how well the fund has recently performed.

For the next 15 years, until John loses his job, he makes regular donations in varying amounts. By this time, all of the contributions he has made to the trust are worth a total of $250,000. John can then collect any payments he has deferred as well as receive the interest income on this amount.

And when John dies, the charity that runs the fund will receive the balance of the gift outright, without having to go to court to argue over the owner.

Exemption from the Capital Gains Tax

Because of the unique nature of pooled charitable trusts, you are allowed to donate securities that have increased in value to a pooled charitable trust. By doing so, you are converting those assets into a money maker for you, and you can do so without paying the capital gains tax. The charitable trust can also avoid the capital gains tax on donated property if that property had been held by the donor for at least a year before donation. It is for this reason that well-performing securities that have been held for over a year are the preferred gift to a pooled charitable trust. The charity is allowed to sell them at present-day market value and pay no capital gains tax. Because there is no tax to pay, that means a larger investment into the trust, which means more income for you!

Here is an example to help make this point clear. Suppose Amy has held 1000 shares for 10 years, and the stock has increased in value from $1 a share to $20 a share. Despite the increase in the stocks' value, however, Amy is disappointed that they do not derive much income for her. If she decided to sell the stocks, she would have to pay a hefty capital gains tax on her gain. Instead, Amy could donate the stocks to a pooled charitable trust, get a deduction on her income tax, and then get income from her investment.

The initial tax deduction Amy would take would be calculated by looking at the market value of the donated stock, $20,000, and then subtracting the value of payments that Amy can expect to receive during her lifetime. This estimate is derived from looking at the recent performance of the trust.

When the charity takes the stock, it sells it off and, because of its charitable nature, it does not need to pay any capital gains tax because Amy held the stock for more than one year. Amy's payments from the trust are based on her $20,000 donation, and Amy will never have to pay the capital gains tax on the $19 a share gain that she saw.

This All Sounds Great, Where Can I Find a Pooled Charitable Trust?

Many, if not most, large charities offered pooled charitable trusts. These charities often include institutions like museums, universities and hospitals. If you wish, these organizations would most likely be more than happy to discuss their trusts with you and help you decide how you should go about donating.

Next Steps
Contact a qualified estate planning attorney to help you ensure
that your loved ones are cared for and your wishes are honored.
(e.g., Chicago, IL or 60611)

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