Accounting for Planned Giving ProgramsPRESENTED BY KEN YOUNGSTEAD, CPA

OCTOBER 7, 2014

OBJECTIVES OF THIS SESSION

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Background and the increased importance of planned giving programs

Internal challenges that exist with these programs

Common types of planned giving programs –related accounting issues

BACKGROUND

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What are planned giving programs? Wills, Estates, Testamentary Bequests Split Interest Agreements NFP receives benefits that are shared with other

organizations or beneficiaries Beneficial Interest Agreements NFP may be the sole beneficiary

Accounting and recognition criteria is very similar

BACKGROUND

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Why establish a planned giving program?

Creative strategies exist Giving from assets vs. Giving from income (cash) Variety of tools available to accomplish donor’s goals Long term buy in from donors – highly committed people to

your mission Likely to give annually as well (invested) Impact from larger gifts can be meaningful Over the long term – major impact on sustainability

CHALLENGES

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Planned giving programs can be complex

Bridge between development department and accounting department is critical Most instances – information is relayed to development

departments Key information for development differs from key

information for accounting

Best practices are not widely published Gift acceptance policies

Do you have a gift acceptance policy

CHALLENGES

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Gift Acceptance Policies

Does your organization have a policy? Some help is not helpful

Do you accept real estate? What if a donor wants to give you that awesome timeshare (that’s basically worthless)?

Do you manage the administration of the gift – and are you ready for that responsibility?

Restrictions on the gift can provide unintended results Include a policy on disposition of certain gifts to avoid

issues

CHALLENGES

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Be careful giving legal or tax advice

You should have legal counsel available to you to assist with issues related to planned giving

Particularly important when making the “Ask”

ACCOUNTING

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Examples of Planned Giving Instruments

Wills / Bequests Charitable Lead Trusts / Remainder Trusts Beneficial Interest Agreements Charitable Gift Annuity Trust Agreements

ACCOUNTING

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Key takeaway from this session

Revocable vs. Irrevocable

Revocable agreements are “intentions to give” and are generally not recorded Irrevocable agreements are “promises to give” and

are generally recorded

Ensure your Development Professionals are aware of this important distinction

ACCOUNTING

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Wills / Bequests Major opportunity in planned giving programs Most traditional bequests are unknown to the NFP

prior to the donor’s death Wills are generally revocable documents (they can

be changed) May contain surprise restrictions (i.e. Endowment

Gift - but you don’t have a formalized Endowment Fund)

Record a receivable when a will becomes valid (court says “This is the will”)

ACCOUNTING

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Wills / Bequests (continued)

Communication is key Internal communication – tracking these gifts can be

difficult Estates can take a long time to settle – how do you

estimate and value your gift Can include real estate, illiquid investments, personal effects

ACCOUNTING

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Wills / Bequests (continued)

Dealing with the family Family members may deal with surprises and can

contest Legal assistance may be necessary to maintain the

interest of the Organization Organization can be in a difficult position It can get expensive to protect your interest

ACCOUNTING

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Wills / Bequests (continued)

Valuation of the estate (or your interest) What do you record (GAAP requires that a contribution be

recorded when the will is validated) Is adequate information available? Do your best to gather the

appropriate facts. Update them regularly. You need a place to keep contemporaneous notes.

ACCOUNTING

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Wills / Bequests (continued)

Financial Statement Preparation Tip: Update your information for certain events you become aware of

after year end – The rule on subsequent events follows:

Subsequent events that provide additional evidence about conditions that existed at the balance sheet date, including estimates that are inherent in preparing

financial statements, should be recognized in the financial statements. Subsequent events that provide evidence about conditions that did not exist at the balance sheet date should not be recognized in the financial statements.

ACCOUNTING

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Beneficial Interest or Split Interest Agreements

Key Accounting question – Is the Organization the trustee of the assets?

If so – the Organization has cash or investments – if not, Organization has an interest in a stream of payments.

For split interest agreements (lead or remainder trusts), Organization may have a liability to record.

Watch for an irrevocable trust funded by a will - the donor can still change the will during his / her lifetime (thus, not currently recognized)

ACCOUNTING

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Organization is Trustee

Record the assets of the trust at fair value along with contribution revenue at its inception

Record a liability for amounts held for others based on the trust term and present value of the stream of payments to be paid (this could be a lead interest or remainder interest)

Use a discount rate appropriate for the risk involved.

ACCOUNTING

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Organization is Trustee (continued)

Key point – you should prudently manage the assets held. You could be at risk if you are overly aggressive or lack diversification with your portfolio

Terms of the payment obligation can be fixed or variable – making it especially important to assess and properly discount the stream of payments

Know about state laws governing annuity contracts if you are marketing these programs

ACCOUNTING

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Organization is Trustee (continued)

Organization can be the income (lead) or remainder beneficiary

Could be a fixed term, or could be based on a beneficiary life expectancy (do you have the information needed?)

In some instances, the agreement can be a revocable agreement in which case, there is a refundable advance to record for the Organization’s interest

ACCOUNTING

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Organization is not the Trustee

Present value the expected stream of payments based on an appropriate discount rate

Key issue – access to information to assist in determination of fair value

(Donor may refuse to provide access to information like investment statements)

ACCOUNTING

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Organization is not the Trustee (continued)

Generally, for beneficial interests in trusts, the Organization can record the interest based on the value of assets in the trust Trust terms could call for delayed payments Trustee can determine when distributions could be made (and

how much)

ACCOUNTING

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Other Financial Statement Considerations

Temporary and Permanent Restrictions Perpetual trusts are permanently restricted Lead and remainder trust interests are time restricted

(temporarily restricted) Agreements may dictate how earnings or distributions are to

be spent

ACCOUNTING

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Other Financial Statement Considerations

Fair Value Disclosures The trust itself is the unit of account (don’t look through to the

investments) Most cases, if you are discounting cash flows to present value,

it’s a Level 2 valuation If there is never access to the assets (such as a perpetual trust),

it’s a Level 3 valuation

ACCOUNTING

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Other Financial Statement Considerations

Financial statement disclosures should include: Summary of terms Basis used for recording assets (i.e. cost, fair value) Discount rate assumptions Any limitations imposed by state laws

ACCOUNTING

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Two Excellent Resources

The AICPA Audit and Accounting Guide has a section dedicated to Beneficial Interest / Split Interest Arrangements (journal entry examples are excellent)

AICPA Financial Reporting Whitepaper – Measurement of Fair Value for Certain Transactions of Not-for-Profit Entities

Planned Giving can make a tremendous impact on your NFP’s long term sustainability – Are you

making the ask?#bbcon

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Thank you

Ken YoungsteadKraftCPAs PLLC – (615) 782-4246

kyoungstead@kraftcpas.comNashville, TN

www.kraftcpas.com

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