GASB Studies Irrevocable Charitable Trusts
April 4, 2014
To identify the types of irrevocable charitable trusts—commonly referred to as split-interest agreements—encountered in the governmental environment, the Governmental Accounting Standards Board (GASB) is conducting pre-agenda research. Most important for higher education, the GASB is evaluating whether resources held for the exclusive benefit of governments in irrevocable trusts meet the definition of an asset of the beneficiary governments.
Currently, funds held in trust by others, where the public institution is a beneficiary of the trust, are not considered assets of the public institution. However, independent colleges and universities that follow accounting guidance established by the Financial Accounting Standards Board (FASB) do recognize assets held in trust by others when the trust is irrevocable and established for the benefit of the institution.
Here are the most common types of split-interest agreements (also refer to NACUBO's Financial Accounting and Reporting Manual):
- Charitable lead annuity trust—a trust agreement in which a donor transfers resources to an institution with the stipulation that the resources be invested and periodic payments be used for institutional purposes (restricted or unrestricted). At the end of the specified trust term, the resources will revert to the donor or be paid to a beneficiary specified by the donor.
- Charitable lead unitrust—the same as a charitable lead annuity trust, except that the amount to be used for institutional purposes is a certain percentage of the trust's fair market value.
- Charitable remainder annuity trust—a trust agreement in which a donor transfers resources to an institution with the stipulation to invest the resources and transfer periodic payments to a beneficiary other than the institution. At the end of the trust term, any remaining resources will be available to the institution for restricted or unrestricted purposes.
- Charitable remainder unitrust—the same as a charitable remainder annuity trust, except that the amount to be transferred to a beneficiary is a certain percentage of the trust's fair market value.
- Charitable gift annuity—similar to a charitable remainder annuity trust, except that no trust agreement exists. A donor transfers assets to a college or university with the stipulation that the institution will make payments to a designated beneficiary for a certain period of time or until the death of the beneficiary. The assets are general assets of the institution, and the liability to the beneficiary is a general liability of the institution.
- Pooled life income fund—a trust arrangement whereby multiple donors' assets are pooled and invested as a group. Each donor is assigned a certain number of units, based on the amount contributed, and income earned by the investments is paid to the beneficiary based on the number of assigned units. When the beneficiary dies, the value of the units is released to the institution for restricted or unrestricted use, as determined by the agreement.
If the donor transfers assets to a third party, such as a bank, to serve as the trustee for the split-interest gift, a public institution does not record the split-interest agreement at the inception of the agreement because the time requirements are not met; GASB Statement 33, Accounting and Financial Reporting for Nonexchange Transactions, indicates that it is not possible for the institution to meet time requirements as the resources are not yet available. The notion of a time requirement in Statement 33 creates a GASB-FASB difference between public and independent institutions.
Additionally, the following question and answer appear in the 2013-2014 Comprehensive Implementation Guide (7.72.11, with emphasis added):
Question: How should a public institution such as a college or university that serves as a trustee report split-interest agreements under Statements 34 and 35? (Q&A34B-133) [Amended 2012 and 2013]
Answer: Split-interest agreements provide that the public institution acts as trustee for the gift assets, with the requirement that an annual distribution be made to a specified beneficiary. Normally, these distributions are for a fixed dollar amount (annuity trust) or a fixed percentage of the trust's fair market value (unitrust). The more common types of split-interest agreements operate similarly.
The public institution should recognize an asset for the fair value of the trust assets and a liability for the obligation to the beneficiary, with the difference between the asset and liability recognized as gift revenue. Changes (for example, changes in actuarial assumptions, revaluations of the present value of the trust assets, or adjustments to discount amortization) should be reflected in the statement of revenues, expenses, and changes in net position or the statement of activities, depending upon the special-purpose government reporting format used by the public institution. Upon termination of the trust, either through death or through expiration of the trust term, the liability should be removed with the offset to a change in the value of the trust in the statement of revenues, expenses, and changes in net position or the statement of activities.
GASB's conceptual framework, specifically Concepts Statement No. 4, Elements of Financial Statements, released in 2007 after Statement 33, defines assets and liabilities and includes notions of control and present service capacity in the evaluation of whether certain elements meet the definition of an asset of liability. For example, paragraph 9 states the following about service capacity: "the present service capacity of a resource that is an asset is its existing capability to enable the government to provide services, which in turn enables the government to fulfill its mission." Further, in a discussion about control, paragraph 12 notes, "many assets, such as investments of a trust or capital assets purchased with grant proceeds, are subject to legal or other external constraints. These assets can be used only as described in the trust agreement or to support the grant program, respectively. Such restrictions on use of an asset should not be considered to negate a government's control of the present service capacity of the asset."
Consequently, it is possible that Concepts Statement 4 would allow governmental entities, such as public colleges and universities, to recognize the assets of funds held in trust by others. Please assist the GASB in this research effort by taking a brief, five-question survey by April 18, 2014. If you have any questions about the survey, please contact Blake Rodgers or Francisco Loredo.
Director, Accounting Policy
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