Distribution Methods Explained

Distribution Methods and Calculations Explained

GiftWrap's Distribute Income routine allows you to distribute income to pooled fund participants each payment period using either of two basic approaches: actual distributions or estimated distributions.

Choose the method for distributing income that is consistent with the distribution method described in the pooled income fund's document of trust.

Method 1: Actual Distributions
The fund distributes income according to the exact amount of income earned during each payment period.

The advantage of this method is that the distribution each payment period matches exactly the net income of the fund. Consequently, no adjusting distribution at the end of each year is necessary using this method. The disadvantage is that you have to wait until after the end of the payment period to determine how much to distribute, so payments typically go out 10-14 days after the end of the payment period.

Method 2: Estimated Distributions
The fund distributes income based on an estimated amount of income earned per unit for the payment period.

The advantage of this method is that the distribution each payment period can be determined prior to the end of the payment period, allowing payments to be sent on the day the payment period ends.

The disadvantage of this method is that an adjusting distribution after the end of each year is necessary to reconcile the amounts distributed during the year with the amounts that should have been distributed. The adjusting distribution disburses the difference between the actual income each participant is entitled to for the year less the estimated payments made to each during the year.

Fund setup options allow you to specify the extent to which the remainderman, estates of deceased beneficiaries, and/or second beneficiaries participate in the adjusting distribution.

Distribution Calculations Explained
Income distributions are allocated among the participants in a fund based on the number of units a gift holds, the number of active beneficiaries the gift has, and the number of days during the payment period the gift's units were in the fund. A number of additional factors can influence how an income distribution is computed, including:

whether the fund makes Actual distributions or Estimated distributions
how first payments are computed
whether or not final payments at death are prorated
if the fund makes Estimated distributions, whether the period is a regular period or an adjusting period
if an adjusting distribution, how deceased estates, the remainderman, and second beneficiaries participate in adjusting distributions

Actual Distribution Example
Assume a fund has three participants: Joe and Jane Smith are both active beneficiaries of a gift that purchased 100 units several years ago. Fred Jones is the sole active beneficiary of a gift that purchased 50 units on 5/1/2003. You are computing a distribution of $1,000 for period 2 of 2003. The fund distributes quarterly and prorates income for gifts made during each payment period.

1) Compute total income units for the period

Joe Smith = 100 / 2 = 50
Jane Smith = 100 / 2 = 50
Fred Jones = 50 x (61/92) = 33.1522
Total income units 133.1522

2) Compute fraction of total income units assigned to each beneficiary

Joe Smith = 50 / 133.1522 = .3755
Jane Smith = 50 / 133.1522 = .3755
Fred Jones = 33.1522 / 133.1522 = .2490

3) Compute payment to each beneficiary

Joe Smith = .3755 x $1,000.00 = $375.50
Jane Smith = .3755 x $1,000.00 = $375.50
Fred Jones = .2490 x $1,000.00 = $249.00

Note: If the fund were set to allocate full income to gifts made during each payment period, Fred Jones would receive 50 income units for the distribution and each of the three beneficiaries would be allocated $333.33.

If the fund were set to allocate no income to gifts made during each payment period, Fred Jones would receive 0 income units for the distribution and receive no income for the period. Joe and Jane Smith would each be allocated $500.00.

Estimated Distribution Examples

Distribution during a regular period
Assume a fund has three participants: Joe and Jane Smith are both active beneficiaries of a gift that purchased 100 units several years ago. Fred Jones is the sole active beneficiary of a gift that purchased 50 units on 5/1/2003. You are computing an estimated distribution of $7.00 / unit for period 2 of 2003. The fund distributes quarterly and prorates income for gifts made during each payment period.

1. Compute income units assigned to each beneficiary

Joe Smith = 100 / 2 = 50
Jane Smith = 100 / 2 = 50
Fred Jones = 50 x (61/92) = 33.1522
Total income units 133.1522

2. Compute payment to each beneficiary

Joe Smith = 50 x $7.00 = $350.00
Jane Smith = 50 x $7.00 = $350.00
Fred Jones = 33.1522 x $7.00 = $232.07

Distribution during an adjusting period
Assume a fund has three participants: Joe and Jane Smith are both active beneficiaries of a gift that purchased 100 units several years ago. Fred Jones is the sole active beneficiary of a gift that purchased 50 units on 5/1/2003. The fund has made total estimated distributions during 2003 of $3,496.21. Early in 2004 you determine that the fund should have distributed a total of $3,600.00 in 2003. The fund distributes quarterly and prorates income for gifts made during each payment period.

1. Compute income units assigned to each beneficiary for the adjusting period

Joe Smith = (4 x .25) x 100 / 2 = 50
Jane Smith = (4 x .25) x 100 / 2 = 50
Fred Jones = ((2 + 61/92) x .25)) x 50 = 33.2880
Total income units 133.2880

2. Compute fraction of total income units assigned to each beneficiary

Joe Smith = 50 / 133.2880 = .3751
Jane Smith = 50 / 133.2880 = .3751
Fred Jones = 33.2880 / 133.2880 = .2497

3. Compute total amount of adjusting distribution

$3,600.00 - $3,496.21 = $103.79

4. Compute payment to each beneficiary

Joe Smith = .3755 x $103.79 = $38.93
Jane Smith = .3755 x $103.79 = $38.93
Fred Jones = .2497 x $103.79 = $25.92

Note: If the fund were set to allocate full income to gifts made during each payment period, Fred Jones would be assigned 37.5000 income units in step (1) instead of 33.2880. This change would affect the amount of each beneficiary's adjusting distribution.

If the fund were set to allocate no income to gifts made during each payment period, Fred Jones would would be assigned 25.0000 income units in step (1) instead of 33.2880. This change would again affect the amount of each beneficiary's adjusting distribution.