Are Your Contributions Coming From a Split-Interest Agreement? (And What Does That Mean?)– December 17, 2018 by Adam Schultz

The wide range of tax and timing implications associated with charitable giving has led to the creation of a variety of donation types and structures. And with that, of course, comes a plethora of accounting implications to be aware of if you are responsible for your not-for-profit’s financial reporting. One arrangement that can be particularly challenging, and therefore is important to understand, is the split-interest agreement. 

What Is a Split-Interest Agreement?

Part of what makes these agreements so complex and difficult to identify is that they can come in many shapes and sizes and often can resemble traditional charitable giving.
 
Split-interest agreements are, in short, giving arrangements in which a not-for-profit shares the benefits of assets with other beneficiaries, which are typically not charitable organizations. The beneficiary entities or individuals receive either cash or other assets during the term of the agreement, called the lead interest, or a portion of the assets remaining at the end of the term, called the remainder interest.
 
Split-interest agreements have a number of potential structures and characteristics, including being either revocable or irrevocable. The term of a split-interest agreement typically spans a specified number of years or a period that ends when a specified event occurs. Commonly, that event is the death of the donor or of the lead interest beneficiary. 

What are Potential Complications of a Split-Interest Agreement?

The complications relating to split-interest agreements are vast. First, it can often be difficult to identify when the gifts received by a not-for-profit organization are actually from a split-interest agreement and not from more traditional annual giving.
 
While the flow of assets (consistent, annual amounts) may not differ from one type of giving to another, the proper recording in accordance with generally accepted accounting principles (GAAP) can be very different. If regular gifts come from the same source, it is likely that a not-for-profit organization is recording cash and revenue each year with each receipt. But if those regular cash flows are the lead interest from a split-interest agreement, the sum of all cash receipts (discounted to a present value) potentially should have been recorded as revenue upon initial execution of the split-interest agreement.
 
If the split-interest agreement is irrevocable and the assets are being held by a third party, then the not-for-profit should record contribution revenue and a receivable balance upon notification of the split-interest agreement’s existence, with amounts being recorded at fair value. If the split-interest agreement is revocable (by the donor), or if the trustee holding the assets has variance power to redirect the benefits to another organization, the not-for-profit should not recognize its beneficial interest in those future inflows and should instead record revenue when it is actually received.
 
As a member of your not-for-profit’s finance and accounting staff, be on alert if you notice consistent gifts have come in from the same source, particularly if it is from a trustee organization on behalf of a donor. A split-interest agreement could very well be behind those gifts, and you may need to make significant changes to the statement of financial position. Reaching out to the trustee or donor is the best place to start to understand if there is a formal split-interest agreement in place.
 
Another complication to look out for is when your not-for-profit is the trustee of the split-interest agreement, and therefore has custody of the assets and is the entity distributing the lead interest to the other beneficiary. In this situation, the assets received are recorded on the statement of financial position at fair value at the date of initial recognition, but a liability also must be recorded for the lead interest amounts to be paid to the other beneficiary. That liability also must be measured at fair value each year. Changes in fair value shall be recognized in the statement of activities.
  
If any of these characteristics sound familiar, then it’s worth taking the time to review the gift agreement or reach out to the donor/trustee to ensure that a split-interest agreement isn’t driving the donations. If it is, and significant changes to the statement of financial position are necessary, the next step will likely be providing an explanation to board members, donors and other key stakeholders.
   
Please contact a member of your service team, or contact Adam Schultz at aschultz@cohencpa.com or Marie Brilmyer at mbrilmyer@cohencpa.com for further discussion. 
 

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.