One of the many ways donors provide financial support to charitable organizations, including private schools, is by establishing trusts or other arrangements under which the nonprofit receives benefits that are shared with other beneficiaries. These planned giving arrangements are commonly known as split interest agreements and they require special accounting treatment.
The most commonly used split interest agreements are:
Charitable lead annuity and unitrusts
Charitable remainder annuity and unitrusts
Charitable gift annuities
Under a CLT, the nonprofit receives periodic payments (the “lead” interest) during the term of the agreement. The payments may be for a fixed dollar amount, an arrangement called a charitable lead annuity trust, or for a fixed percentage of the trust’s fair value as determined annually, a charitable lead unitrust. At the termination of the agreement, the remaining assets revert to the donor or the donor’s designated beneficiary (the “remainder” interest).
Under a CRT, the trust makes periodic payments to the donor (the “lead” interest) or the donor’s beneficiary during the term of the agreement. At the termination of the agreement, the remaining assets revert to the nonprofit (the “remainder” interest). The payments to the donor or beneficiary may be for a specified dollar amount, an arrangement called a charitable remainder annuity trust, or for a specified percentage of the trust’s fair value as determined annually, a charitable remainder unitrust.
Under a CGA, the donor and nonprofit enter into an agreement whereby the donor contributes assets (typically cash or shares of stock) to the nonprofit in exchange for a promise by the nonprofit to pay a fixed amount for a specified period of time or for the life of the donor or beneficiaries designated by the donor. CGAs are similar to CRTs except that no trust exists. The assets received are held as general assets of the nonprofit and the annuity liability is a general obligation of the nonprofit.
The initial recognition of CLTs and CRTs depends on who controls assets (whether or not the nonprofit is trustee).
When the nonprofit is not the trustee, a beneficial interest in trust and contribution revenue are recorded at fair value upon the creation of the trust. In cases where the nonprofit is the trustee, the nonprofit will recognize contribution revenue, assets held in trust and a liability for amounts held for others in the period in which the trust is established.
Typically, present value techniques are used to determine the fair value of the contribution. Under a CLT, the fair value of the contribution can be estimated based on the present value of the future distributions to be received by the nonprofit as a beneficiary. Under a CRT, the fair value of the contribution can be estimated based on the fair value of the assets contributed by the donor less the fair value of the payments to be made to other beneficiaries.
In the case of CGAs, the nonprofit should record a liability for the fair value (present value of the future payments if present value techniques are used) of the future payments to be made to the donor and contribution revenue for the difference between the assets received and the liability.
Determining the classification of contribution revenues as with or without donor restrictions is another nuance of split interest agreements that must be considered.
Contribution revenues recognized under split interest agreements are classified as with donor restrictions unless the donor has explicitly given the nonprofit immediate right to the assets without restrictions, in which case they would be classified as without donor restrictions.
Planned giving arrangements carry very specific terms and features, which makes it imperative for the nonprofit to obtain and review all supporting documentation surrounding the charitable gift in order to determine the proper accounting treatment.
Unfortunately, nonprofits might not always be recording split interest agreements correctly or might not realize that they are a party to a split interest agreement at all. As a result, nonprofits might be understating assets, liabilities, revenue and net assets.
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