The first installment of this article focused on the bad news regarding limitations to Stretch IRAs as a result of the SECURE Act. This segment focuses on some alternative planning uses of the Pooled Income Fund (“PIF”) which are less well known than the PIF. Readers are encouraged to review Part I of this article which covers the basic of the PIF.
Many of you that have read my articles know by now that I am a longtime enthusiast of the weight room and have never taken offense to the comment that “Nowotny knows squat”. But of course! My wife (aka Long Suffering or Mrs. Nowotny) has always been mystified by the appeal of picking up heavy weights, unless of course, she needs me to move something in the house. Why not tennis, golf or sailing?
She is a tremendous aficionado of fine art and fine film and a great lover of history. She has saved me from a lifetime of B movies among many other things. I have seen every film and documentary about Henry VIII, Sir Thomas More and Thomas Cromwell because of her, whether I wanted to see it or not. The movie A Man for All Seasons about the struggles of conscience of Sir Thomas More won an Oscar in 1966.
The Pooled Income Fund is a PIF for all seasons. The tax attributes in the current low interest environment has stronger attributes than the charitable remainder trust (“CRT”) for tax planning purposes. This article will outline some of the novel uses of the PIF.
A. The Poor Man’s CRT
It is hard to avoid laughing at some of Rodney Dangerfield’s jokes. His punchline, “I get no respect” could be the punchline of the PIF. The PIF has lived a lifetime in the shadow of the Charitable Remainder Trust, as the “Poor Man’s Charitable Remainder Trust.” Most pooled income funds sponsored by large public charities have largely been shut down over the last two decades and it is almost certain that the pooled income funds that remain, face extinction. So why bother writing an article about a planned giving technique that no one cares about anymore! In the current low interest rate environment, one significant factor advantage of the PIF versus the CRT is the level of the income tax deduction for contributions to a PIF. New pooled income funds that have existed less than three years have the ability to use to use an interest rate that is determined each year based on the three-year average of the IRC Sec 7520 rate minus one percent.
In the current low interest rate environment, the difference in the amount of the deduction between the PIF and CRT is significant. In my professional opinion, the rate for PIF’s is likely to fall significantly from 2.2 percent to at least 1.5 percent if not lower. This rate drop will make the already appealing PIF more appealing.
As a result, the creation and donation to a PIF has the ability to create a large tax deduction in the year of contribution with the ability to carry forward unused excess deductions five additional tax years into the future. Contributions of cash are currently deductible up to sixty percent of a taxpayer’s Adjusted Gross (AGI). This planning construct allows a taxpayer to offset a substantial income realization event taxed at ordinary rates using the PIF.
B. Real Estate in a PIF
Instead of an IRA A number of taxpayers seek to own real estate within a self-directed traditional IRA or Roth IRA. A major limitation in this approach is the contribution limit into these accounts. As a result, the low contribution threshold forces the taxpayer to pursue debt-financing within the self-directed IRA in order to acquire the real estate. A major limitation of owning real estate within an IRA, is the presence of unrelated business taxable income (UBTI) in the event that debt financing is used to acquire the real estate. UBTI converts income that would otherwise be non- taxable within the IRA, into taxable income based on the percentage of debt financing attributable to the real estate.
The PIF is taxed as a complex trust and is not subject to UBTI. The taxpayer receives a tax deduction for the contribution of existing real estate within the PIF. The use of debt financing in the purchase of real estate will not create UBTI to the PIF. Real estate subject to debt financing will not create UBTI within the PIF.
The trustee of the PIF is able to use the depreciation tax benefits from the real estate as well as other expenses to reduce the amount of taxable income distributed to the PIF’s income beneficiary. The sale of the real estate with