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Split Interest Agreements

Split interest agreements, giving arrangements (contributions), whereby benefits are shared by an organization and other beneficiaries, have grown in popularity as a result of legacy gift campaigns and in an effort to protect individual estates.Because some of these gifts can date back upwards of 30-50 years, many nonprofits don’t realize that the annual distributions they receive may be generated from a split interest arrangement. When not accounted for properly, nonprofits are not in compliance with generally accepted accounting principles (GAAP) and are leaving what can be significant assets and contributions off the financial statements.

Types of Split Interest Agreements

There are two basic types of split interest agreements – revocable and irrevocable. In addition, they can take the form of the following gift arrangements:

  • Charitable Lead Trusts
  • Charitable Remainder Trusts
  • Perpetual Trust
  • Charitable Gift Annuity
  • Pooled (or life) Income Funds

Accounting Considerations

Revocable split interest agreements are merely intentions to give and should not be recognized as a contribution unless legally enforceable. Contributions received by nonprofit organizations under irrevocable split-interest agreements should generally be measured at fair value when received. In October 2011, the AICPA Financial Reporting Executive Committee and the Not-for-Profit Entities Fair Value Task Force released “Financial Reporting Whitepaper: Measurement of Fair Value for Certain Transactions of Not-for-Profit Entities,” in which various measurement techniques for split interest agreements are discussed.

After the initial recording for irrevocable split interest agreements, an organization will need to recognize various transactions and events during the agreement term. If assets contributed under an irrevocable split-interest agreement are held or controlled by a third party, the organization should recognize changes in the fair value of its beneficial interest using the same valuation technique it used to measure the beneficial interest initially. However, if the organization is the trustee, the measurement of the liability will change as a result of (a) amortization of the discount set up to record the benefits to be received at fair value and (b) revaluations of the future payments to the beneficiaries based on changes in life expectancy and other actuarial assumptions, unless the measurement objective is fair value.

Transactions that must be recorded during the term of the agreement should be recorded as increases or decreases to the assets and liabilities under the agreement, with a corresponding amount recorded as the change in the value of split interest agreements in the statement of activities. The amount in the statement should be classified as unrestricted, temporarily restricted, or permanently restricted, depending on the classification when the contribution was initially recorded. A nonprofit serving as trustee should recognize income earned on assets, gains and losses on sales of assets, and distributions to other beneficiaries as well.

At the end of the split-interest agreement’s term, an amount necessary to reduce to zero all assets and liabilities related to the agreement should be recognized in the statement of activities as changes in the value of split-interest agreements. That amount should be classified as unrestricted, temporarily restricted, or permanently restricted, as appropriate. Any distributions previously received under the terms of the agreement that become available to the nonprofit for its unrestricted use when the agreement terminates should be reclassified from temporarily restricted to unrestricted net assets.

As we have seen, accounting for split interest agreements can be complex because there are different types of agreements – all with their own nuances. That is why it is important to fully understand the ins and outs of split interest agreements – ensuring your nonprofit is in complete compliance with all regulations.

Lee T. Sullivan, CPA, CGMA, is a Manager at Witt Mares, PLC and leads the firm’s Not-For-Profit team. Witt Mares, PLC is a regional accounting and consulting firm serving clients throughout the Mid-Atlantic. Please contact the author at lsullivan@wittmares.com or visit www.wittmares.com.

Topics: Nonprofit Leadership and Practice