How to Feel Good While on a Budget — Pooled Charitable Trusts?

Gone are the days when it is only the rich who could benefit from tax breaks from charitable trusts. It used to cost over $100,000 just to hire a lawyer and start it. But if you pool money from a group of people, it is possible to set up your own charitable trust for much less, starting at around $5,000 to $10,000.

Pooled Trusts — How it Happens

The benefiting charity sets up the trust 

The charity itself would set up the trust, or an investment company could do it for the charity. They will be responsible in accepting donations. The donations are pooled and invested in the stock market—like a mutual fund. When enough money is made from the investments, the money is paid to you.

There’s no need to stop giving

You may keep donating beyond the minimum amount of donation set by the charity. It is a great way to invest when you don’t have a lot of money for other kinds of investments. It is an alternative way to gain income even during retirement, which would pay them back from what they have invested through the years.

What can be donated to a pooled charitable trust?

Stocks and bonds can also be donated as long as they are not the tax-exempt kind. But physical properties such as real estate and cars are not allowed.

Tax Incentives and Income

You can reduce your taxes!

For every time you donate to a pooled charitable trust, you can get an income tax deduction, but not the full amount of donation. You are, after all, making an income too from the trust. How much you receive depends on how soon the beneficiary is expected to receive the income and interests of the fund.

You also get income!

The beneficiaries you have identified or yourself will be paid by the charity according to the value of your total contributions and the fund’s annual income. These are subject to tax just like an ordinary income, but the payments may be deferred. Some people would choose to defer the payment until they are retired so that they may have an additional source of income by then.

For example, Sheldon has been employed in the same company for over 20 years and makes $120,000 a year. Sheldon loves going to the local museum and decides to donate $10,000 to the museum’s pooled charitable trust. Sheldon will now be allowed to deduct a portion of the donated amount from his income tax, based on his life expectancy and the recent performance of the fund. For the following 15 years, Sheldon keeps on making contributions to the fund in various amounts and has made a total of $300,000 in donation. Sheldon may then collect payments he has deferred and the interest from the donated amount.

And upon Sheldon’s death the charity that handles the fund will get the balance of the gift directly without going through court.

Exemption from the Capital Gains Tax

You may be able to donate to a pooled charitable trust securities that have increased in value. This is possible because this type of fund’s unique nature. If you do this, you can convert those assets into income-generators without having to pay the capital gains tax. If a donor has held a property for more than a year prior to donating, then the charitable trust may also avoid the capital gains tax. The charity can sell the property at its current value without capital gains tax. Since there are not taxes to pay, the more you invest, the more income you can get.

As an example, let’s take a look at Brenda’s case. She held 1000 shares for 5 years and the value has increased from $2 a share to $20. Despite this increase, Brenda is still disappointed that it has not increased her income. If she sells, then she needs to pay a large sum in capital gains tax. So instead of selling, Brenda donated the stocks to a pooled charitable trust. She got a deduction from her income because of the donation, and at the same time gets income from her investment.

The initial tax deduction Brenda could get is calculated by considering the market value of the donated stock, $20,000, and then subtracting the value of payments that Brenda can expect to receive during her lifetime. This estimate is through consideration of the recent performance of the trust.

The charity does not need to pay any capital gains tax because Brenda has held the stock for more than one year and Brenda’s payment from the trust will be based on the $20,000 donation. Brenda doesn’t need to pay capital gains tax on the $18 increase in the share’s value.

This all sounds great, where can I find a pooled charitable trust?

A lot of large charities offer pooled charitable trusts. Universities, museums, hospitals and the like may offer such trusts. You can do search over the internet or inquire from hospitals, museums and universities in your area who will be more than happy to give you more information about their charities.

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