POOLED INCOME FUND

Pooled income funds are another type of split-interest gift. Unlike CRT’s that are established by the donor, pooled income funds are created and operated by charities. Gifts to a pooled income fund are merged with the gifts of other donors, and, in that respect, closely resemble a mutual fund.

As with CRTs, you are entitled to a deduction in the year of contribution. The charitable deduction is based on your age and the funds highest rate of earnings in the previous three years. You give money or property to the fund in exchange for fund units, which entitle you to a pro rata share of the fund’s actual income each year for the remainder of your life. At your death, your share of the fund passes outright to the charity.

GIFT ANNUITY

In a charitable gift annuity, you make a gift to charity in exchange for a guaranteed income for life. A charitable gift annuity is very much like buying an annuity in the commercial marketplace, except that you get an immediate charitable deduction equal to the excess of the contribution over what the annuity is worth, based on IRS tables.

Unlike the pooled income fund or CRT, income from the charitable gift annuity is an obligation of the charity that does not depend on investment results. The rate of return on the gift annuity is not variable, as in a pooled income fund, or negotiable, as in a CRT.

As with any annuity, a portion of each year’s annuity payment is tax-free allowing you to recover your “investment in the contract” over your life expectancy. The simplicity of charitable gift annuities allows for much lower contribution limits, typically in increments of five thousand ($5,000) dollars (depending on the charity). You may recognize capital gain if appreciated assets are transferred to the charity to purchase the annuity.

CHARITABLE LEAD TRUST

A charitable lead trust is a CRT in reverse: the charitable beneficiary is entitled to the current income with the non-charitable beneficiary entitled to the remainder. The general rules of CRT’s apply to charitable lead trusts with the exception that there is no requirement that the payout rate be a minimum of 5%.

Charitable lead trusts are primarily used to save estate and gift taxes, and do not provide the same income tax saving opportunities as CRT’s. To accomplish this result, you must postpone the receipt of the trust assets by your family until the charitable lead interest of the charity has expired.

WEALTH REPLACEMENT TRUST

If you fear that making substantial gifts will deprive your children of their inheritance, you should consider a “wealth replacement trust.” Notwithstanding the bumper sticker credo, “I’m spending my children’s inheritance,” most parents want their children to be properly remembered. Fortunately, the needs of the family can be accomplished by creating a “wealth replacement trust” concurrently with the split interest trust.

A wealth replacement trust allows you to leave a substantially larger tax free inheritance to children. Here’s how it works: basically, a portion of the income distributed to you from your CRT is used to purchase a life insurance policy inside a wealth replacement trust (which is simply an irrevocable trust). At your death, the charity receives the assets remaining in the CRT, and your family receives the life insurance proceeds from the wealth replacement trust.

The net effect of this arrangement is as follows: 1. You get a substantial income tax deduction in the year you create the CRT. 2. Your taxable estate is reduced by the gift. 3. The charities of your choosing receive bequests at your death. 4. Your children receive tax-free life insurance proceeds.

The following diagram illustrates the use of a CRT in combination with a wealth replacement trust: