NOWOTNY KNOWS SQUAT! Helping Advisors Build a Clientele and Assets Under Management!


Looking back, I remember distinctly my introduction to the Iron Game (weightlifting). At around age 5, I lived in Balboa, in the Panama Canal Zone. Balboa High School was right down the street from my house. The high school was where all of the summer activities took place. I wandered into the weight room on the second floor and lifted a 50-pound dumbbell (not over my head) but off the ground. From there it was a love for Hercules movies featuring the former Mr. Universe, Reg Park, as Hercules. At age 13, I suffered a knee injury in football and discovered the weight room for real as part of my recovery. Thanks to one of my favorite coaches in the Canal Zone, Morris Finkelstein (of blessed memory), I never looked back or left the weight room. Over the years as a competitive powerlifter into my 50's I developed a big-league squat and deadlift. So, I really do know squat!


This is the first installment of a series in the new year to help financial advisors to build and retain a clientele and increase assets under management with cutting-edge ideas. Each article is designed to bring a creative planning idea that helps the financial advisor to demonstrate value while implementing solutions with financial products.


The Customized Pooled Income Fund (PIF)


The presidential election is behind us and it's my bet that marginal tax rates for high-net-worth taxpayers will take a vertical leap upward. There isn't a tax technique that won't get a second look. The customized pooled income fund is a technique that you may be unfamiliar with except for its similarity to the pooled income fund (PIF) sponsored by large charities. Historically, pooled income funds have been the poor man’s version of the charitable remainder trust. Pooled income funds were regularly sponsored by larger public charities and have largely been wound down in recent years and eliminated as the charitable remainder trust proliferated in popularity. The Pooled Income Fund (PIF) that we are discussing is a customized version for the high-net-worth taxpayer and his family.


The PIF that we are discussing in this article is a pool that is set up with a minimum of $250,000 and the taxpayer. An additional taxpayer will make a de minimis contribution into the PIF.

The magic of the customized PIF lies in the method used to calculate the value of the remainder interest which passes to a public charity at the death of the taxpayer and any additional income beneficiaries. If a pooled income fund has existed for less than three taxable years, the charity is able to use an interest rate in calculating the charitable deduction by first calculating the average annual Applicable Federal Midterm Rate (as described in IRC §7520 for each of the three taxable years preceding the year of the transfer. That rate has risen over the last several years to 2.2 percent for the 2021 tax year. The pooled income generates an income tax deduction that is two-three times larger than a charitable remainder trust in most circumstances in the current interest rate environment. A pooled income fund is a charitable trust that is established and maintained by a public charity. The taxpayer retains an income interest for a single or joint lifetime or even multiple lifetimes. The remainder interest of the PIF may be the taxpayer’s donor advised fund. The pooled income fund receives contributions from individual donors that are commingled for investment purposes within the fund. These contributions can be made with cash or appreciated capital assets. Each donor is assigned "units of participation" in the fund that are based on the relationship of their contribution to the overall value of the fund at the time of contribution. Each year, the fund's entire net investment income is distributed to fund participants according to their units of participation. Income distributions are made to each participant for their lifetime, after which the portion of the fund assets attributable to the participant is severed from the fund and used by the charity for its charitable purposes. The trust may avoid capital gains taxes by adding the capital gain income to trust principal or defining the definition of trust income within the PIF to include short term capital gain income.


Summary

At the end of the day, the PIF is a creative tax solution. It can generate a substantial tax deduction while allowing the taxpayer to retain an income interest. The PIF discussed in this article can provide the financial advisor with the ability to manage the investments within the PIF. For appreciated capital assets, it can mitigate capital gains consequences. For cash contributions, the PIF can operate as a partially deductible supplemental retirement plan with customized investment options managed by the financial advisor. The financial advisor can utilize life insurance to replace PIF assets that ultimately pass to the taxpayer's donor advised fund. Of course, there has to be a catch and there is in this case. To the best of my knowledge, very few charities are aware or participating in the customized PIF realm. This is an idea that every advisor who still needs and wants new clients and still has an interest in growing his assets under management.


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