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§ 5.5 POOLED INCOME FUNDS(d) Determining the Charitable DeductionAs noted earlier, a planned gift is predicated on the fundamental concept that anitem of property carries with it an income interest and a remainder interest. Mostdeductible planned gifts involve a contribution of a remainder interest in propertyto a charitable organization.Such is the case with a gift to a charitable organization by means of a pooledincome fund. As always, a first step is to determine the fair market value of theproperty being transferred. Once that is done, the present value of the incomeinterest retained or designated by a donor is ascertained. The difference betweenthe value of the property and the value of the income interest is the value of theremainder interest. The amount of the charitable deduction occasioned by atransfer of cash or property to a pooled income fund is based on the value of theremainder interest in the property (that is, the fair market value of the propertyless the value of the income interest).The present value of the income interest in property contributed to a pooledincome fund generally depends on two elements: the age of the income beneficiary(or beneficiaries) and the rate of return experienced by the pooled incomefund. The rate of return used to value the income interest is determined by referenceto the highest rate of return experienced by the fund for any of the threeyears of the fund preceding the year in which the transfer is made. When apooled income fund has not been in existence for three years in advance of theyear of a gift, a 9 percent rate of return must be presumed.The Department of the Treasury has developed tables to use in determiningthe present value of remainder interests in property transferred to pooled incomefunds. These tables, which are gender neutral, establish factors used with respectto income beneficiaries of various ages and rates of return.(e) Tax Treatment of Income Distributions and Pooled Income FundsA beneficiary of income distributions from a pooled income fund is taxed on thepayments in accordance with the tax rules that apply to the types of net incomeexperienced and distributed by the fund. Thus, the tax treatment of distributionsto income beneficiaries from pooled income funds is determined in accordancewith the standard trust rules. The rules governing the taxation of distributions toincome beneficiaries from charitable remainder trusts (which, as noted above,characterize the receipts as ordinary income, capital gain, and/or nontaxablereturn of capital) are inapplicable to distributions from pooled income funds.Unlike charitable remainder trusts, pooled income funds are not formally taxexempt.A pooled income fund, however, is allowed a deduction for distributionsof income to beneficiaries and for long-term capital gains that have been permanentlyset aside for charitable purposes. (Therefore, a pooled income fund is taxableon all income, including short-term capital gain, which is not distributable tobeneficiaries.) Consequently, a pooled income fund is essentially tax-exempt.(f) Selection of TrusteeAs noted, a pooled income fund must be maintained by the charitable organizationthat is the recipient of the remainder interests in the cash or properties 159