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There are a number of ways that you could structure the distributions from a pooled fund.
The most important factor will be the method of tax reporting – based both on the legal
structure of the pool itself, and on the tax status of the investor accounts. Another factor for
the decision is how you want the statements to your investors to look.
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- If all of the investor accounts are non-taxable, then the tax aspect is not part of the
decision. In this case, you might decide to structure the pool similar to a fund that
would be held in an annuity. This method would keep all of the income inside the pool
and the value of each share would increase as the value of the entire pool increases.
- For this situation, no programming or operations are needed for distributions
because you won’t be making any. You would use the standard TrustNet
programs to track the ownership of each investor in the pool, and the value of
those shares.
- You could operate your pooled fund similar to a mutual fund, which means that you
calculate a distribution either on a daily accrual basis or a declared date basis. With
this method, you could either make a cash distribution, or make a transaction that
receives and reinvests the income with the automatic purchase of more shares in the
pool.
- For this structure, you can use the same standard TrustNet programs that you
would use to recognize dividends and capital gains from a mutual fund. You will
need to make a policy decision about how to handle periods that have a capital
loss. At year-end, you would use the standard TrustNet programs to produce the
1099-DIV forms.
- If the legal structure of the pool requires Schedule K-1 reporting, we can write a
program to create book value adjustments for each investor, for each type of
distribution. At year-end, we can accumulate those amounts in a Schedule K-1
worksheet.
- If this is your situation, then the rest of this document is for you.
- If your structure is different from those listed above, we can use our experience to
tailor a solution for you.
The programs in this module can streamline your distribution process if you will not be
making cash or reinvested distributions. The first step would be to identify the categories of
distribution that need to be tracked in order to have the details for Schedule K-1 reporting.
We would create a separate Book Value Adjustment transaction code for each category.
Examples of commonly used distribution categories include:
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- Dividends
- Interest
- Long-term Capital Gains
- Short-term Capital Gains
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Basically, any taxable activity that happens inside the fund will need to be distributed to the
investors so that they can prepare accurate tax returns. We can structure your program to
adjust each tax lot separately or to consolidate adjustments on the first tax lot.
For year-end reporting on Schedule K-1, we could …
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- adapt the Tax Worksheet to classify your special Book Value Adjustment codes, and/or
- adapt the Export to ONESOURCE Trust Tax to classify your special Book Value Adjustment
codes, and/or
- build a report or spreadsheet specifically to summarize the Schedule K-1 transactions
for the year.
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A Pooled Fund Distributions Program adds value to the core system by …
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- automating the creation of transactions to reflect the distribution of a taxable event
without changing either shares or cash balances. This automation streamlines the
operations of the pooled fund.
- creating the adjustments to the basis of shares held so that when those shares are sold,
the investors will not be double-taxed on amounts already reported on Schedule K-1.
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- Export to ONESOURCE Trust Tax to engage tax reporting specialists.
- NAV Calculator to determine the price at which investors will buy or sell shares in a
pooled fund.
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