Many clients find great satisfaction in donating to a charitable mission that they are passionate about. And it doesn’t hurt that there’s usually an associated income tax benefit to giving as well. As a financial advisor, you’re in a unique position to help your clients create and implement a giving strategy to achieve their philanthropic and tax planning goals.
Let’s compare two giving options that can address both of these objectives: pooled income versus donor-advised funds.
Help your clients achieve their philanthropic and tax planning goals with our free guide to charitable giving options.
How Does a Pooled Income Fund Work?
A pooled income fund is a tax-exempt charitable trust operated by a charity that provides donors (i.e., your clients) with an immediate tax deduction and an income stream for life. It’s similar to a charitable remainder trust in that it is a split-interest trust with both charitable and noncharitable beneficiaries.
The noncharitable beneficiary (the donor) contributes assets to the pooled income fund and, in return, receives a proportional interest in the fund. The charity then commingles the contributed assets with contributions from other donors. Typically, the assets are sold immediately, and the proceeds are reinvested in various managed portfolios. The donor (or designated income beneficiary) then receives an annual payment based on the earnings of the pooled investments. Upon the death of the income beneficiary, the remainder of the donor’s share is passed to the charity.
How Does a Donor-Advised Fund Work?
A donor-advised fund (DAF) is an account administered by a public charity to accept donations from a donor. A DAF may be managed by the donor’s financial advisor (i.e., you) to distribute funds to other charities in the future. Donations to the fund are generally tax deductible in the year in which they are made.
When a client contributes to a DAF, he or she becomes a grant advisor, meaning he or she can make recommendations to the sponsoring charity as to the timing, amount, and recipients of future distributions from the fund. Although the grant advisor’s recommendations are nonbinding, as long as the recommended distribution is to a qualified charity, the sponsoring charity of the DAF will generally follow the suggestion.
Pooled Income Versus Donor-Advised Funds: Advantages and Disadvantages
Which Fund is Right for Your Clients?
Those clients with highly appreciated assets and a desire for tax deduction may very well benefit from either giving option. In general, clients who wish to meet philanthropic goals while addressing issues such as tax planning and retirement income may benefit from a pooled income fund. The option to contribute real estate to this type of fund also provides a possible solution for clients for whom charitable giving is not the primary objective. On the other hand, a DAF may be the ideal solution for clients who want to secure a tax deduction today and benefit from professional management of their charitable donations.
The key to helping your clients achieve their philanthropic and tax planning goals is having a detailed knowledge of what those goals are. Once you know what your clients really want—as well as what’s not so important to them—you can begin to guide them down the right path. With a thorough understanding of the pros and cons of pooled income versus donor-advised funds, you can offer your clients the right solution for their situation.
How do you communicate the pros and cons of charitable giving methods to clients? How do you determine the best strategy to help them achieve their goals? Please share your thoughts with us below!
Commonwealth Financial Network® does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
Editor’s Note: This post was originally published in October 2014, but we’ve updated it to bring you more relevant and timely information.