the ins and outs of planned gift accounting
DESCRIPTION
By Ken YoungsteadTRANSCRIPT
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Accounting for Planned Giving ProgramsPRESENTED BY KEN YOUNGSTEAD, CPA
OCTOBER 7, 2014
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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
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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
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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
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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
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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
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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”
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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
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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
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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”)
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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
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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
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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.
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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.
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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)
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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.
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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
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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
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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)
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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)
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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
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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
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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
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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
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Planned Giving can make a tremendous impact on your NFP’s long term sustainability – Are you
making the ask?#bbcon
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Tweet this now
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Thank you
Ken YoungsteadKraftCPAs PLLC – (615) 782-4246
www.kraftcpas.com
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