Accounting and Disclosures for Planned Gifts
By Sarah Avery, Director, Tax & Business
Implementing a planned giving program in-house or by using outsourced providers is considered a best practice and essential to accomplishing your organization’s charitable mission.
One of the next considerations is developing policies and procedures for accounting and disclosure of planned gifts.
Planned gifts can be either conditional or unconditional. Organizations need to differentiate between the two types of gifts because unconditional gifts are recorded – but conditional gifts are not. Conditional gifts are dependent upon the occurrence of a future or uncertain event. Receipt of unconditional gifts depends only upon the passage of time. Additionally, in order to meet accounting standards, unconditional planned gifts must also be “irrevocable”. The gift is not irrevocable if the donor can cancel the gift sometime in the future. Under generally accepted accounting principles (“GAAP”), only unconditional irrevocable planned gifts can be recorded on the organization’s books, neither conditional or revocable gifts can be recorded.
Conditional gift example: Notification that the organization is a named beneficiary in a donor’s will is an intention to give. This is considered conditional as the bequest is dependent upon a future event.
Unconditional gift example: One of the more popular unconditional planned gifts is the split-interest agreement. Split-interest agreements are established by donors because of the significant tax advantages. As is evident from the name, any interest in an asset that is split between the beneficiary organization and the donor or non-charitable beneficiary is a “split interest”. There are a number of different types of split-interest agreements: charitable lead trust, charitable gift annuity, pooled (life) income fund and the charitable remainder trust.
Charitable remainder trusts (“CRT”) provide for the future transfer of a remainder interest in an asset to a charitable organization, while providing an income stream to the donor or non-charitable beneficiary for life or a set term. The remainder interest is transferred to the organization at the end of the term or donor’s life. The CRT generates a stream of revenue to the donor and a current tax deduction that minimizes current income taxes. For example, a donor that funds a CRT with appreciated securities can take an income tax deduction for the fair market value of the securities on the date of donation. When the appreciated assets are sold by the CRT, realized capital gains are not subject to tax and the CRT does not pay tax on future growth or earnings on the investment.
For example, an organization receives a beneficiary interest in a CRT with the following facts:
|Value of asset donated||$1,000,000|
|3% quarterly annuity||$30,000|
|Current age of donor||65 years old|
|Life expectancy||84 years old (19 years remaining)|
|Present value of annuity over life expectancy (per IRS tables)||$424,000|
|Present value of remainder interest||$576,000|
Upon receipt, the organization records the following entry to recognize the beneficiary interest in the CRT:
|Charitable remainder trust||Asset||$1,000,000||Asset in CRT is recorded at fair value|
|Payable to donor or non-charitable beneficiary||Liability||$424,000||Present value of future payments to be made to donor or other non-charitable beneficiary computed based upon the corresponding life expectancy or set-term|
|Contribution revenue temporarily restricted||Income||$576,000||Reflects the assets (the beneficiary interest) that the orgainization expects they will receive based upon the donor’s life expectancy|
Both the liability and income are recorded at present value determined using the appropriate discount rate (2.2% in this example). The discount rate effectively converts the future value of the remainder interest into an equivalent “present value”. The contribution revenue is classified as “temporarily restricted” to account for the time restricted nature of the asset(s).
Over the life of the CRT, at least on an annual basis, the organization needs to account for changes in the value of the CRT’s underlying assets, including annuity payments, investment earnings and changes in the fair market value. An increase in value is recognized as additional contribution revenue and a decrease in value is recognized as a decrease in contribution revenue.
|Payable to donor or non-charitable beneficiary||Liability||$30,000||Annual annuity payment made to donor or other non-charitable beneficiary|
|Charitable remainder trust||Asset||$30,000||Reduce the asset account for annual annuity payment made to donor|
|Charitable remainder trust||Asset||$xx,xxx||Increase in value from investment earnings and change in fair market value|
|Contribution revenue – temporarily restricted||Income||$xx,xxx|
The notes to the financial statement should include a description of the general terms for each type of split-interest agreement, the basis used for recording beneficiary interests (e.g., fair value), assumptions used to determine discount rates to compute present values, life expectancy assumptions, and any other terms of the split-interest agreements.
Accounting and finance staff also need to coordinate with the fundraising department to obtain records and supporting schedules of conditional and revocable gifts, as these gifts are required to be disclosed in the notes to the financial statements. The following information should be disclosed regarding conditional planned gifts:
- The total of the amounts promised, and
- A description and amount for each group of promises having similar characteristics.