Endowments and Split Interest Agreements · Endowments and Split Interest Agreements Crowe HorwathLLP Pete Ugo, Partner Angie Lewis, Managing Director ... Facts: 6/30/2014 Gift $1,000,000

© 2017 Crowe Horwath LLP

Endowments and Split Interest Agreements

Crowe Horwath LLP

Pete Ugo, PartnerAngie Lewis, Managing Director

November 8, 2017

© 2017 Crowe Horwath LLP 2

Pete Ugo, CPA

Pete is a partner at Crowe Horwath LLP and leads the firm’s Not-for-Profit and Higher Education audit practice . Pete has 20 years of experience and has spent his entire career working with not-for-profit organizations.

His client base includes colleges/universities, foundations, trade/membership, cultural arts and social service organizations. He frequently conducts internal and external training sessions on Uniform Guidance and other technical topics impacting the higher education and not-for-profit industries.

He is a member of the planning committee for the AICPA’s Not-for-Profit conferences, and previously served as the chair of the Indiana CPA Society’s Not-for-Profit conference for 5 years.

Pete is a graduate of the University of Notre Dame, and currently resides in Indianapolis, Indiana with his wife and four children.


Angie Lewis, Managing Director

Angie has been with Crowe for 18 years and is a Managing Director in the Assurance Professional Practice which serves as Crowe Horwath’sNational Office.

In this capacity her responsibilities include providing guidance on matters related to accounting, auditing, compliance, ethics, independence, audit quality, and inspections as well as drafting responses to professional standards proposed by the Financial Accounting Standards Board (FASB), the Governmental Accounting Standards Board (GASB), and other authoritative bodies. Prior to joining the National Office, Angie specialized in providing audit, accounting, and compliance services to not-for-profit, educational, and governmental organizations.

Angie also serves as Chair of the Ohio Society of Certified Public Accountants (OSCPA) Accounting and Auditing Committee.

Angie is a graduate of the University of Dayton and currently resides in Columbus, Ohio with her husband and five children.

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Have You Heard This Before?

• Not-for-Profit Accounting:

• That’s the ‘easy work’ that public accounting firms do outside of the “real” busy season.

• What could be complex about a not-for-profit organization’s accounting?

• You do all of that work pro-bono, right?

• Would you rather work at a for-profit company – to have more complexity and challenge?


The Complex and Challenging World of Not-for-Profit Accounting

UBIT

Form 990


Ten Things You Should Know About Endowments


1. What is an Endowment?


What is an Endowment?

Oxford: “To enrich with property; to provide by bequest

or gift; a permanent income”

Webster: “The part of an institution’s income derived

from donations”

AICPA: “Funds...which a donor or other outside agencies have stipulated, as a condition of the

gift instrument, that the principal is to be maintained

inviolate and in perpetuity and invested for the purpose of

producing present and future income...”


An Endowment Is NOT:

• Our entire investment account balance

• All of our assets

• The total of our most recent fundraising campaign

• A pot of money that we can use or borrow from whenever we want


2. What Counts As An Endowment?


UPMIFA “Endowment fund” means an institutional fund or part thereof that, under the terms of a gift instrument, is not wholly expendable by the institution on a current basis. The term does not include assets that an institution designates as an endowment fund for its own use.

GAAP “Endowment fund” is defined as an established fund of cash, securities, or other assets to provide income for the maintenance of a not-for-profit organization. The use of the assets of the fund may be permanently restricted, temporarily restricted, or Unrestricted. Endowment funds generally are established by donor-restricted gifts and bequests to provide a permanent endowment, which is to provide a permanent source of income, or a term endowment, which is to provide income for a specified period. The portion of a permanent endowment that must be maintained permanently—not used up, expended, or otherwise exhausted—is classified as permanently restricted net assets. The portion of a term endowment that must be maintained for a specified term is classified as temporarily restricted net assets. An organization’s governing board may earmark a portion of its unrestricted net assets as a board-designated endowment (sometimes called funds functioning as endowment or quasi-endowment funds) to be invested to provide income


What Counts for GAAP?

• Board-Designated Endowment Funds• An organization’s governing board may earmark a portion of its unrestricted net assets • Common examples:

• Bequests• Planned giving proceeds• Unexpected large contributions• Fundraising campaign proceeds that are not donor-restricted

• Term Endowment Funds• Donor-restricted and must be maintained for a specified term and is temporarily restricted net assets

• True Endowment Funds• Donor-restricted gifts and bequests to provide a permanent endowment, which is to provide a

permanent source of income, or a term endowment, which is to provide income for a specified period. The portion of a permanent endowment that must be maintained permanently—not used up, expended, or otherwise exhausted—is classified as permanently restricted net assets


3. I Have An Endowment, Now What?


Initial Accounting

• Debit – could be any of the following:• Cash (most preferred by the accounting department!)• Investments• Land• Pledges receivable*• Beneficial interest in trust*• Other

*These items may not be legally subject to endowment laws….but are often times considered part of the endowment

• Credit – Contributions (usually, but not always, permanently restricted)


Endowment Fund Basics!

Unrestricted

$0.00

$0.00

$0.00

Temporarily Restricted

$0.00

$100,000

$45,000

Permanently Restricted

$1,000,000

$1,000,000

$1,000,000

Total Endowment Fund (Net Assets)

Facts:

6/30/2014 Gift $1,000,000

Investment gains $100,000 6/30/2015

Total $1,100,000

Spending policy of 5% Less: $(55,000)

Fund total $1,045,000

Example: Investment returns are positive and in excess of an organization’s spending policy.

$1,045,000

Wait for it, we will get

to this


4. What Do I Do With It’s Earnings?


Earnings

Accumulate earnings until appropriated by the Board

Pooling of Endowment Funds is permitted

Classify unappropriated, accumulated earnings in Temporarily Restricted Net Assets

Appropriated earnings are classified as Unrestricted


Ongoing Accounting and Tracking

• Allocation of investment returns• What portion of the school’s investment portfolio is related to the endowment?

• Unitized endowment pool• Each individual endowment fund as a % of the total

• Did the donor specify that some of the returns should be preserved for future buying power?

• How may the earnings be used – purpose restrictions?

• Calculation of annual appropriation/spending

• Roll-forward of details for disclosure in financial statements


5. I Have This Money Now, How Do I Spend?


UPMIFA-In making a determination to

appropriate or accumulate, the institution shall act in good faith, with the care that an ordinarily prudent person in a like position would exercise under

similar circumstances, and shall consider

The duration and preservation of the endowment fund

The purposes of the institution and the endowment fund

The general economic conditions

The possible effect of inflation or deflation

The expected total return from income and the appreciation of investments

Other resources of the institution

The Investment Policy of the institution

Source: Uniformlaws.org


Spending Ceiling

The appropriation for expenditure in any year of an amount greater than seven percent of the fair market value of an endowment fund, calculated on the basis of market values determined at least quarterly and averaged over a period of not less than three years immediately preceding the year in which the appropriation for expenditure is made, creates a rebuttable presumption of imprudence.


Note: Certain states have not enacted this ceiling and/or certain types of institutions are exempt


Determining a Spending Policy

Moving Average of Market Valuation Method – typically uses simple averages over 3-5 years, but weighted method calculations are also popular; this method may place greater emphasis on the most recent year, for example.

Inflation-Adjusted Method– more stable income for current beneficiaries, higher potential impact on investment longevity.

Hybrid Method – averages the valuation moving average method with the inflation-adjusted method.

Other Methods – spending all of current income, determining a rate each year, or spending a percentage of a market value at a point in time.

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According to the 2012 NCSE report analyzing the investment and governance practices of endowed institutions of higher learning, 75% of those studied utilize some version of a moving average method to smooth the impact of volatile markets on annual distributions*. However, the report goes on to further illustrate a trend in the increasing number of institutions deciding on an appropriate rate each year – likely in response to volatility during the 2008 market.


6. How Are Others Spending?


How Do Foundations Spend?

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Source: 2015 Council on Foundations/Commonfund Institute Study of Investments of Endowments


How Types Of Foundations Spend?

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How Not-For-Profit Organizations Spend

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Source: SEI-The Current Landscape of Nonprofit SpendingMethodologies & Investment Strategies for Foundations & Endowments


What Does Their Spending Policy Look Like?

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What is included?

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What Is Higher Education Doing?

Source: 2015 NACUBO-CommonfundStudy of Endowments

*The effective spending rate represents the distribution for spending divided by the beginning market value (endowment value on or around the beginning of the fiscal year). The distribution for spending is the dollar amount withdrawn from the endowment to support expenditures on student financial aid, faculty research, maintenance of facilities, and other campus operations, as determined and defined by each institution. The rate is calculated net of any investment fees and expenses for managing the endowment.


7. Who Cares What I Do?


UPMIFA = Law

Created to bring the law governing charitable

institutions in line with modern investment and

expenditure practice


What Are the Goals of UPMIFA?

To make sure that the best investment practices govern the actual investment of institutional funds.

To withdraw obsolete rules governing prudent total return expenditure and provide a modern rule of prudence consistent with the rules that govern investment. To eliminate differences in investment and expenditure rules that apply to different types of nonprofit organizations. The same rules govern all under UPMIFA.

To encourage growth of institutional funds while eliminating investment risks that threaten principal.

To assure that there are adequate assets in any institutional fund to meet program needs.

To make the law governing institutional funds uniform in every state.



UPMIFA Enactment

Enacted in all but one state and Puerto Rico

Enacted in all but one state and Puerto Rico



UPMIFA

UPMIFA

• Applies to institutional funds held by an organization exclusively for charitable purposes.

• Eliminated the concept of historic dollar value by adopting modern investment management theory and the concept of prudent endowment spending.

• “Subject to the intent of a donor expressed in the gift instrument, an institution may appropriate for expenditure or accumulate so much of an endowment fund as the institution determines is prudent for the uses, benefits, purposes, and duration for which the endowment fund is established.”

• Outlines seven factors for accumulating and spending endowment funds• Introduced the rebuttable presumption that spending more than 7% of the

value of the fund in one year is imprudent• FMV calculated on the basis of market values determined at least

quarterly and averaged over a period of not less than 3 years• Does not create a presumption of prudence for an appropriation less than

7%• Does not require a specific amount be set aside as principal to maintain

purchasing power of the fund• Earnings and appreciation are classified as temporarily restricted until

the funds are appropriated and any purpose restrictions met

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8. Dang, The Market Crashed Now What?


Underwater Endowments

• GAAP says... “In the absence of donor stipulations or law to the contrary, losses on the investments of a donor-restricted endowment fund shall reduce Temporarily Restricted Net Assets to the extent that donor-imposed temporary restrictions on net appreciation of the fund have not been met before the loss occurs.

• Any remaining loss shall reduce Unrestricted Net Assets. If losses reduce the assets of a donor-restricted endowment fund below the level required by the donor stipulations or law, gains that restore the fair value of the assets of the endowment fund to the required level shall be classified as increases in Unrestricted Net Assets.”

• NOTE: This is current GAAP treatment - the presentation of “underwater” endowments will change with the implementation of ASU 2016-14.


Underwater Endowment Fund

Unrestricted

$0.00

$0.00

$(31,000)

Temporarily Restricted

$0.00

$20,000

$0.00

Permanently Restricted

$1,000,000

$1,000,000

$1,000,000

Total Endowment Fund (Net Assets)

Facts:

6/30/2015 Gift $1,000,000

Investment gains $20,000 6/30/2016

Total $1,020,000

Spending policy of 5% Less: $(51,000)

Fund total $969,000

Example: Investment returns are positive but less than organization’s spending policy, endowment is underwater.

$969,000


9. We Are Down, Can I Spend?


Yes!

“Underwater market conditions”

UPMIFA allows an institution to maintain appropriate levels of expenditures in time of economic downturn or economic strength. In some years, accumulation rather than spending will be prudent, and in other years an institution may appropriately make expenditures even if a fund has not generated investment return that year. The institution should establish spending policies that will be responsive to short-term fluctuations in the value of the fund.

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Caution

Consult your endowment, spending and investment policies.

Consult donor agreements.

Even though spending underwater is allowed under UPMIFA, you may NOT be allowed pursuant to policies or donor instructions.


10. What Do I Have To Tell Others?


GAAP required disclosures (for all endowment funds, including board-

designated) are as follows:

Description of the Board’s interpretation of the law governing

donor-restricted endowment funds

The Organization’s policies for

appropriating endowment assets

for expenditure

The Organization’s endowment

investment policies– Return objectives and risk parameters– How the objectives

relate to spending policy(ies)

– Strategies for achieving objectives

Detail endowment information for all

endowments:a. Endowment Net

Asset Composition by Type of Fund at year

endb. Changes in

Endowment Net Assets for the year

These disclosures are additions to the

net asset and investment

disclosures requiredby current

accounting standards, which continue to apply

GAAP Required Disclosures


Sample Disclosures

The University/College has interpreted the Ohio Uniform Prudent Management of Institutional Funds Act (OUPMIFA) as requiring preservation of the fair value of the original gift as of the gift date of the donor-restricted endowment funds, absent explicit donor stipulations to the contrary.

As a result of this interpretation, the University/College classifies as permanently restricted net assets:(a) the original value of gifts donated to the permanent endowment, (b) the original value of subsequent gifts to the permanent endowment, and (c) accumulations to the permanent endowment made in accordance with the direction of the applicable donor gift instrument at

the time the accumulation is added to the fund.

The remaining portion of the donor-restricted endowment fund is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the University/College in a manner consistent with the standard of prudence prescribed by OUPMIFA. In accordance with OUPMIFA, the University/College considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds:

a) The duration and preservation of the fundb) The charitable purposes of the University/College and the donor-restricted endowment fundc) General economic conditionsd) The possible effect of inflation and deflatione) The expected total return from income and appreciation or depreciation of investmentsf) Other resources of the University/Collegeg) The Investment Policy of the University/College


Questions?

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Split Interest Agreements


Session Objectives

• Development vs. Accounting = Different Languages

• Complex types of contributions – overview of planned giving

• Description of planning giving instruments

• Deeper dive regarding “split-interest agreements”

• Accounting vs. Development Differences:• Challenges and Pitfalls• Suggestions


Do Complex Types of Contributions Make You Feel Like This?

Charitable Remainder Trusts

Charitable Lead Trusts

Donor Restrictions

Wills

Capital Campaigns

Life Estate Trusts

Charitable Gift AnnuitiesDonor Advised Funds

Annual Campaigns

Non-Cash Contributions

Gifts In-Kind

Life Insurance

Donated Services

Multi-Year Pledges

Conditional GiftsPerpetual Trusts


Or Do Discussions Between Accounting and Development Feel Like This?


Why Should We Have a Planned Giving Program?

• Benefits to Your Institution:• Can expand the pie

• Benefits to Your Donors:• Fulfills philanthropic intent• May decrease income taxes (Income/Capital Gains)• May decrease or eliminate transfer taxes (Estate, Gift Tax)


More Reasons…

• Planned giving initiatives represent the third “leg of the stool” for a balanced development program (Annual, Capital, Planned)

• Having planned giving options available to prospective benefactors dramatically broadens the means they have to support your institution at significant levels

• Planned gifts are often the largest and most meaning-filled gift a benefactor will make to your institution


Overview Of The Most Common Instruments In A Planned Giving Program

• Bequests• Charitable Qualified Plans Designations• Charitable Life Insurance Designations• Retained Life Estates• Split Interest Agreements

• Charitable Remainder Trusts• Charitable Lead Trust• Charitable Gift Annuities• Other


Bequests - Basic Facts

• 85% of all planned gifts are bequests.

• Specific Bequest: specific dollar amount or specific asset.

• Percentage Bequest: a percentage of the donor’s estate or undivided interest in an asset.

• Residuary Bequest: after satisfying other bequests, donor gives residue or remainder of estate.

• Contingency Bequest: if other bequests cannot be honored, then those bequests go to charitable organization.


Retirement Assets - The Basics

• Types of accounts:• IRAs, • 401(k) plans• Profit sharing plans• Keogh plans• 403(b) plans

• Double taxation• Estate taxes• Income tax


Gifts of Retirement Assets - How it Works

• Designate charity as the primary beneficiary for a percentage (1 to 100 percent)

• Designate charity to receive a specific amount before the remainder is divided among other beneficiaries

• Designate charity as contingent beneficiary


Gifts of Retirement Assets – Benefits

• Avoids DOUBLE TAXATION!• Easy to set up• Allows donors to continue to take withdrawals during lifetime• Allows donors to change the beneficiary if circumstances change


Life Insurance Gifts - How to Give

• Designate institution as beneficiary of the policy• Donor retains control (may access the cash value) • No lifetime income tax advantages

• Donate an existing life insurance policy to institution• Donor gives up control • Tax advantages

• Institution purchases a policy on donor’s life• Donor makes annual tax-deductible gifts to the charity equal to the premium and charity pays premium

payments to insurance company• BE SURE TO ARRANGE PREMIUM PAYMENTS WITH YOUR DONOR


Life Insurance - Benefits

• Convenience: Simple process

• Tax Savings: Significant income, estate, and gift tax savings may be available

• Privacy: Not a matter of public record

• Size of Gift: Donor may be able to make a larger gift and have more impact to the institution

• The full amount: Because life insurance gifts are generally not subject to estate taxes or probate costs, institution receives all the proceeds the donor designates


Retained Life Estate - Defined

• An irrevocable gift of a remainder interest in a personal residence or farm from a donor to an institution, in which the donor retains the right to use the property for a term that is specified in the gift agreement.


Retained Life Estate: How It Works

• Donor transfers personal residence or farm to institution subject to a life estate agreement

• Donor continues to live in the property for life or a specified term of years and remains responsible for all taxes and upkeep

• The property passes to institution upon donor’s death or after the term specified in the agreement

Life Estate

Institution

Donor

Gift Usage


Retained Life Estate – Donor Benefits

• Taxes:• Receives an immediate income tax deduction for a portion of the appraised value of property• Can terminate life estate at any time and may receive an additional income tax deduction• Not subject to capital gains on the sale of contributed assets• Removes gifted assets from taxable estate

• Permitted to give a significant asset to charity, but may retain the security of using it for the rest of donors life


Seven Things You Should Know About Split Interest Agreements


1. What Does “Split Interest Agreement” Mean


From the AICPA’s Not-for-Profit Audit and Accounting Guide

• Chapter 6 – “Split-Interest Agreements and Beneficial Interest in Trusts”

• Trusts or other arrangements under which not-for-profit entities (NFPs) receive benefits that are shared with other beneficiaries

• Under a split-interest agreement, a donor makes an initial transfer of assets to a trust, a fiscal agent, or directly to the NFP in which the NFP has a beneficial interest but is not the sole beneficiary.

• The time period covered by the agreement is expressed either as a specific number of years (or in perpetuity) or as the remaining life of an individual or individuals designated by the donor.


From the AICPA’s Not-for-Profit Audit and Accounting Guide

• Chapter 6 – “Split-Interest Agreements and Beneficial Interest in Trusts”

• The assets are invested and administered by the NFP, a trustee, or a fiscal agent, and distributions are made to a beneficiary or beneficiaries during the term of the agreement

• At the end of the agreement's term, the remaining assets covered by the agreement are distributed to or retained by either the NFP or another beneficiary or beneficiaries.

• Split interest agreements may be held/administered by NFP or third party

• Key word (if you remember anything from this session…remember this word)……


Irrevocable

• Only record if irrevocable. Do not record if revocable.

• An NFP’s interest in the assets of a split-interest agreement is revocable if the donor, a trustee, or a third party can cancel the agreement and redirect the assets.

• An NFP’s interest in the assets of a split-interest agreement can be revocable even if the agreement itself is irrevocable. • The donor can retain, or give to a third party, the power to substitute another charitable beneficiary

without jeopardizing the donor’s charitable deduction. • Unless the use of that power is limited by the agreement to situations that are remote of occurrence

(such as the failure of the named charitable beneficiary to qualify as a charitable organization under Internal Revenue Code Section 170) or unless the parties that can change the beneficiary are no longer living, the interest of the named NFP is revocable


Donor

Income Beneficiary

Remainder Beneficiary

Interest is “split” between these two parties


2. Types of Split Interest Agreements


Types of Split Interest Agreements

Charitable Lead Trusts

Charitable Remainder

Trusts

Trusts held by a Third

Party

Pooled Income Fund

Charitable Gift Annuity


Charitable Gift Annuities – Defined

• A contract under which a charity, in return for a transfer of cash or other property, agrees to pay a fixed sum of money for a period of time. Similar to a CRAT, but not a separate legal trust


Types of Charitable Gift Annuities

• Immediate - Donor starts receiving payments at the end or beginning of the payment period immediately following contribution.

• Deferred - Donor starts receiving payments at a future time. The annuitant will receive a higher rate based on compound interest factors.

• Flexible - Donor does not have to choose the annuity starting date at the time of the contribution. Donor often opts to wait until retirements needs are more predictable.


Charitable Gift Annuities - Donor Benefits

• Income Stream Benefits• Lifetime income stream, which may be higher than current investments• May convert non-income producing assets into a reliable fixed income stream• Easy way to increase retirement income

• Tax Benefits• Immediate income tax deduction• Part of the annual income is a tax-free return of capital• Capital gains tax savings with contribution of appreciated securities• Gift amount removed from taxable estate

• Other Benefits• Not complicated• Can accommodate modest sized gifts


Charitable Gift Annuities – Institution Benefits

• Efficient way to administer a large number of smaller denominated donations

• Provides donors concerned about finances a means to provide meaningful gifts to their favorite charity, potentially increasing the size of future gifts

• Broadens the universe of potential donors and assists in establishing new donor relationships


Charitable Gift Annuities - Oversight

• American Council On Gift Annuities (ACGA)• Incorporated in 1993 as a not-for-profit organization, the ACGA provides suggested charitable gift

annuity rates for use by charities and their donors. • In addition to providing these rates which are accepted as the standard in the charitable field, the ACGA

provides educational information and training opportunities to charities nationwide.

Website: www.acga-web.org


Charitable Remainder Trust

• An irrevocable arrangement (established either during life or at death) in which a donor:• Establishes and funds a trust that has benefits for both a named beneficiary

(current) and remainder NFP (future)• Specified distributions to be made to a designated beneficiary or beneficiaries

over the trust's term.

• Term can vary between specified number of years or the lives of the non-charitable beneficiaries

• The distributions may be for a fixed or variable amount:• Annuity Trust (CRAT)• Unitrust (CRUT)

• Upon termination / maturity of the trust, an NFP receives the assets remaining in the trust

Donor

CRT

Non-Profit

Gift

RemainderInterest

Income


Charitable Remainder Trusts – Other Features

• Must be paid to 1 or more non-charitable beneficiaries at least annually• Must be not less than 5% of the trust’s value or more than 50% of trust’s value

• Must equal at least 10% of the initial FMV of the trust property

Income StreamIncome Stream

RemainderRemainder


Charitable Remainder Trusts – Funding

• CRT may be funded with contributions of cash, securities or real property

• CRTs may NOT be funded with encumbered property• Donors are NOT permitted to continue to enjoy the use of the property

DODO

DO NOTDO NOT


Charitable Remainder Trusts - Benefits

• Immediate income tax deduction on the remainder charitable interest• No capital gain recognized on the sale of the contributed assets• Removes gifted assets from taxable estate • Pays income to donor and/or a designated third party during lifetime• Receive recognition during one’s lifetime for gifts “given” posthumously

to the charitable institution


Charitable Lead Trust

• An irrevocable arrangement (established either during life or at death) in which a donor:• Establishes and funds a trust that has benefits for

both an NFP (current) and remainder named beneficiary (future)

• The distributions may be for a fixed or variable amount:• Annuity Trust (CLAT)• Unitrust (CLUT)

• Upon termination of the trust, the remainder of the trust assets is paid to the donor or to the beneficiaries designated by the donor

• Opposite flow of cash in comparison to remainder trust, and less common

200701108 TPB-PB 21055 (01/07)

CLT

Non-Profit

Donor

Gift

Individual Beneficiaries

Trust Remainder Income


Others

• Pooled Income Fund• Trust in which donors are assigned a specific number of units based on the

proportion of the fair value of their contributions to the total fair value of the pooled income fund on the date of the donor's entry to the pooled fund.

• Until a donor's death, the donor (or the donor's designated beneficiary or beneficiaries) is paid the actual income (as defined under the arrangement) earned on the donor's assigned units. Upon the donor's death, the value of these assigned units reverts to the NFP

• Perpetual Trust• Arrangement in which a donor establishes and funds a trust administered

by an entity other than the NFP that is the beneficiary. • Under the terms of the trust, the NFP has the irrevocable right to receive the

income earned on the trust assets in perpetuity, but never receives the assets held in trust.


3. Accounting Example - Charitable Gift Annuity



• Donor enters into a CGA agreement with institution• $100,000 of cash transferred• Annuitant/Donor is 76 years old• 6% payout annually

• Calculation of contribution revenue needs to consider all of the above facts, as well as:• Discount rate (does not change in later years)• Life expectancy tables

200701108 TPB-PB 21055 (01/07)81



• Accounting treatment in year 1• Debit: Cash $100,000• Credit: Contribution revenue (TR or PR) $46,445 (what will development “count”?)• Credit: Annuity liability $53,555

• In subsequent years• Record annuitant payment - debit liability, credit cash• Adjust liability balance and “maturity” through “change in value of split interest agreements” account.

200701108 TPB-PB 21055 (01/07)82


4. Accounting Example - Charitable Remainder Trust


Charitable Remainder Trust (with third party trustee)

• Donor sets up an irrevocable CRT with their bank acting as trustee:• $100,000 deposited into trust• Institution named as remainder beneficiary• Donor is the income beneficiary, age 76• 6% payout (unitrust – so $6,000 first year, and 6%

of trust balance in future years)

• Other factors – discount rate (updated each year) and life expectancy


Charitable Remainder Trust (with third party trustee)

• Accounting treatment in year 1• Debit: Beneficial Interest in Trust $56,544• Credit: Contribution Revenue (TR or PR) $56,544

• In subsequent years• Debit: Beneficial Interest in Trust $ x• Credit: Change in Value of Split Interest Agmt. $ x

• The above entry assumes that the beneficial interest increased.• Debit and credit would be opposite if beneficial interest decreased.• The entry is based on the trust’s balance each year. (What if donor will not provide?)


Charitable Remainder Trust (no third party trustee)

• Same criteria as the previous example, except that the institution (remainder beneficiary) is now the trustee.

• Accounting treatment in year 1• Debit: Cash $100,000• Credit: Contribution Revenue (TR or PR) $56,544• Credit: Liability (PV* of estimated payments) $43,456

*Discount rate does not change in subsequent years

• In subsequent years• Debit: Liability $6,000• Credit: Cash (for payment to income beneficiary) $6,000

• Additional debits and credits will vary based on investment performance:• Record returns on invested funds• Recalculate liability balance based on life expectancy, current trust balance and new payout amount.• Change in liability will be run through the change in value of split interest agreements account.


5. Accounting Example - Perpetual Trust


Perpetual Trust

• NFP receives notification that it is a 25% beneficiary of perpetual trust valued at $20 million.• Accounting treatment:

• Debit: Beneficial Interest $5,000,000• Credit: Contribution Revenue - PR $5,000,000

• Permanently restricted by time, payouts may be unrestricted or temporarily restricted, based on donor’s intent

• Current year investment return payout check arrives for $175,000, along with the year-end statement showing new trust value of $21.5 million• Accounting treatment:

• Debit: Cash $175,000• Credit: Contribution Revenue – UR or TR $175,000

• Debit: Beneficial Interest $375,000• Credit: Contribution Revenue - PR $375,000


6. How Do Split Interest Agreements Appear in the Financial Statements?


Statement of Financial Position

• Investments (could be cash or property in some cases)• Charitable gift annuities• If trust is held / administered by the NFP

• Beneficial Interest Assets• If trust is held / administered by third party

• Net presentation – no separately liability shown on NFP’s financial statements• Perpetual trusts

• Split-Interest Liability• For present value of estimated payouts due to beneficiaries

• Would apply to charitable gift annuities and trusts administered by the NFP• Discount rate used to calculate the liability doesn’t change over the life of the trust



Statement of Activities

• Contributions

• Investment returns

• Change in value of split interest agreements


7. Split Interest Agreements Impact on Financial Statement Footnotes


Required Disclosures – Split Interest Agreements

• ASC 958-30-50• Description of the general terms of existing split interest agreements• Amount of assets and liabilities recognized (if not shown separately on SOFP)• Any limitations imposed on the assets held under split interest agreements• Nature of assets held under the split interest agreements (if not evident)• Basis for recognized assets (i.e., fair value)• Discount rates and actuarial assumptions used• Contribution revenue• Changes in value of split interest agreements recognized (if not shown separately on SOA)• Fair value disclosures required by ASC 820


Fair Value Disclosure

• Recognition of split-interest agreements requires assets and liabilities to be initially measured at fair value and, in certain cases, requires them to be re-measured at fair value subsequently.

• “Re-measured” triggers ASC 820 disclosure in fair value footnote• Would include beneficial interests held by third parties and trusts• Would not include split interest agreements where the NFP is trustee/administrator

• Common classifications:• Perpetual trusts = level 3• Beneficial interests in trusts = level 2 or 3• Investments held by NFP for trusts = level 1, 2 or 3


Fair Value Disclosure


Endowment/ UPMIFA Disclosure

• Some split interest agreements may be for endowment-related purposes• Some may not be legally subject to UPMIFA laws since NFP doesn’t control the assets (i.e., perpetual

trusts, beneficial interests in trusts held by others, etc.)

• Reconciliation from ending endowment balances to Permanently Restricted Net Assets (as shown on SOFP) is permissible • Differences exist for pledges receivable, perpetual trusts, etc.


Challenges & Pitfalls Related to Development “Counting” vs. GAAP Accounting


Challenges

• Management and staff confusion• Board of Directors confusion• Have we met our goal?• Audited financial statements may be inconsistent with internal reports• Audit adjustments and management letter comments• May lead to distrust of internal reports• When to give naming rights in a capital campaign?• When to awards scholarships, start construction, or fund program activities?• Public acknowledgement of gifts before any cash received – what if donor does not pay?• Budget grows to match development amounts…but accounting can’t make it “balance.”• Donor relationship issues – what if your XYZ Building is open, and XYZ donor hasn’t paid a

dime?!


Challenges (Continued)

• Are split interest agreements part of the capital campaign totals

• Gap between revenue and cash – not a liquid asset!

• Tax reporting requirements

• Complex and infrequent

• Valuation can be complicated if donor doesn’t share details

• Communication• Accounting finds out after the fact• Development has not informed accounting that trusts exist


Pitfalls – Examples of What Has Gone Wrong

• Accounting department not included in creation of agreement• Beneficiary payout rates• Commitments made to donors that have financial implications• “Underwater” position creates budget demand on the NFP

• Capital Campaign or Program/Endowment Commitments• Cash comes in the future, but have we made obligations now?

• Communication to the Board• “We met our fundraising goal”…..but no cash to do anything yet.

• Development department maintained all details• Accounting didn’t know that they existed• Understated assets and revenue


Pitfalls – What Has Gone Wrong?

• Incorrect accounting • Audit adjustments• Management letter comments• Frustration between accounting and development

• Gift acceptable policy doesn’t address split-interest agreements

• Pressure from donors or related parties (i.e., Board members) to accept


Summary Points and Suggestions


A Few Examples of Items Not Recordable Under GAAP

• Intentions to give• Revocable bequests• Nice conversations with potential donors• Matching gifts before the match is raised• Promises to provide future services• Undocumented pledges• Conditional pledges• Internal allocations (i.e., use of restricted net assets or distributions from donor-advised

funds)• Collections on previous pledges

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Conquering the Challenges

• Develop and document a gift acceptance policy• One of the most important reasons – it allows an institution to say “no thanks” to donor• Provides consistency• Removes case-by-case decision process and accompanying emotion/pressure• Does your organization want to accept donor’s “gently used car” or “wonderful second home” (And

don’t’ forget environmental risks!)


Suggestions for Split Interest Agreements

• Communication between Accounting and Development

• Create a thorough Gift Acceptance Policy and periodically review / update

• Consistent process for evaluating the financial impact of donor agreements (i.e., Development required to get Accounting approval on payout rates)

• Think very hard before allowing planned gifts to be “counted” in a capital campaign

• Consider outsourcing options


Suggestions for Split Interest Agreements

• Educate the Development staff about general parameters• Big difference between a 50 year old split interest donor vs. a 75 year old split interest donor

• Remind them (again and again) that split interest agreements donated today do not mean cash is available today

• Split interest agreements are often times easier to understand than many people initially think.

• Development and Accounting Departments may speak different languages (and get frustrated with each other) over these types of donor agreements…..but they have the same ultimate goal of helping the organization achieve its mission and goals.


Questions?

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Angie Lewis, CPACrowe Horwath [email protected]

Pete Ugo, CPACrowe Horwath [email protected]

Documents

Endowments and Split Interest Agreements · Endowments and Split Interest Agreements Crowe HorwathLLP Pete Ugo, Partner Angie Lewis, Managing Director ... Facts: 6/30/2014 Gift $1,000,000