A charitable trust is a trust that is set up for a charitable purpose (such as education, medical research and poverty). For example, someone could put money into a trust to benefit a certain charity or organization of their choosing.

The charity will have to be recognized by the IRS and be tax-exempt in order to qualify. The charity will decide how to invest your assets and issue you or your designated beneficiaries income that is generated.

Many people set charitable trusts up in order to receive tax breaks. For example, you and your beneficiaries may be able to receive tax breaks for income tax, estate tax and capital gains tax. However, charitable trusts traditionally require a minimum investment of $100,000. This amount of money can be tough for many individuals to come up with on their own.

There is another option if you wish to set up a charitable trust but can only invest a smaller amount of money. A pooled charitable trust allows several individuals to pool their money together to come up with the threshold donation amount. Most pooled trusts will allow donations as small as $5,000 or $10,000.

Donating to a pooled charitable trust is an excellent way to generate some extra income and can help with future plans, such as providing for a child’s education or making extra money for retirement. However, make sure you are informed about the risks before moving forward. It is crucial that you do a lot of research about the charity or organization that you wish to invest in before taking the next steps. You could also discuss going in on a pooled trust with close family and friends.

How is a Pooled Charitable Trust Created?

As you can see, there are a lot of benefits to creating a pool charitable trust. But how do you actually create one? Below are the key steps for creating a pooled charitable trust:

  1. Choose a charity or organization that is recognized by the IRS and has tax-exempt status;
  2. Provide the charity or organization with your investment. This is generally in the form of cash or securities;
  3. The charity or organization that you choose will then set up the pooled charitable trust after enough individuals pool their money to meet the overall threshold donation amount;
  4. The charity or organization will decide how to invest the money. You will not have a say in how your donation is invested. Make sure you are aware of the risk that the investment could not do as well as projected;
  5. Once an investment generates a return, each member of the pool will get income paid to them; and
  6. In the years following your initial investment, you can choose whether you want to make additional donations to the pooled trust. This is usually done in increments of $1,000 or more.

What Tax Breaks are Available for Pooled Charitable Trusts?

You can also receive tax breaks for participating in a pooled charitable trust. This includes a deduction for income tax. A tax deduction will reduce the amount of income that you are taxed on, which will in turn decrease the amount of money that you owe on taxes each year.

Keep in mind that the income tax deduction for participating in a pooled charitable trust will not be for the entire amount that you donated because you are still receiving income payments after the trust gets a return on investment. That income that you receive will be taxed as your personal income, just as with your regular wages earned.

Instead, the amount you can deduct for the donation alone will depend on several factors, including beneficiary life expectancy and how much money the trust in generating from the investment. This can get tricky, so it would be smart to consult a local tax attorney or local estate attorney when determining your available income tax deduction amount.

After donating securities or properties to a pooled charitable trust, you should also become educated about the potential for a capital gains exemption. You may be able to avoid paying capital gains tax on your donation if you owned it for one year prior to the donation and it increased in value.

In turn, you will overall gain more income from the trust. This is something to take into consideration when you are deciding what property or security to donate to the pooled charitable trust.

Do I Need to Hire an Attorney to Set Up a Pooled Charitable Trust?

If you are considering donating to a pooled charitable trust, you should consult with an estate attorney or tax attorney to help you determine which charity you can donate to, how much you can donate, what the projected return on investment will be and what potential tax breaks you can receive.

Hiring a professional to help you with this will ensure that you make the best choices for your specific financial situation and long term goals.