GASB’s Guidance for Irrevocable Split-Interest Agreements is Now in EffectBy John D'Amico | May 29, 2018
The Governmental Accounting Standards Board (“GASB”) Statement No. 81 Irrevocable Split-Interest Agreements is now in effect for financial statement periods beginning after December 15, 2016 (December 31, 2017 year-ends and thereafter) and should be applied retroactively. This statement standardizes the accounting and financial reporting for split-interest agreements for governmental entities. Public colleges, universities and hospitals will most likely be the recipients of these gift arrangements, which are created through trusts or other legally enforceable agreements. The provisions of this Statement apply to financial statements prepared using the economic resources measurement focus and the current financial resources measurement focus.
This Standard only covers irrevocable agreements. Revocable agreements, in which the donor has reserved the right to terminate the agreement at will and have the donated assets returned to the donor or a third party, are covered in GASB Statement No. 33.
An irrevocable split-interest agreement provides benefits to two or more beneficiaries (e.g. a government and other beneficiary designated by the donor) and cannot be revoked. Many individuals use split-interest agreements to distribute all or a portion of their estate when they die for both philanthropic purposes and tax benefits.
A donor can make an initial transfer of assets to an intermediary such as a trust or fiscal agent, or to a government entity directly in which the governmental entity has a beneficial interest but is not the sole beneficiary. Examples of irrevocable split-interest agreements include charitable remainder trusts, charitable lead trusts, and life interests in real estate.
A GOVERNMENT IS BOTH THE INTERMEDIARY AND BENEFICIARY
CHARITABLE REMAINDER TRUST
A charitable remainder trust is an arrangement in which a donor establishes a trust to provide an income stream (lead interest) during the life of the donor or the trust term. Upon termination of the trust, the government receives the remaining assets in the trust.
Under the new Statement, the government should recognize the following:
• Assets for resources received or receivable
• A liability for the lead interest that is assigned to the other beneficiaries
• A deferred inflow of resources for the government’s unconditional remainder interest
CHARITABLE LEAD TRUST
A charitable lead trust provides resources to a government throughout the term of the arrangement in the form of periodic disbursements. The term can be for a set amount of years or upon the death of the donor (a life-contingent agreement). Upon termination of the trust, the remainder of the trust assets is paid to the donor or to the beneficiaries designated by the donor.
The government should now recognize the following:
• Assets for resources received or receivable
• A deferred inflow of resources for the government’s unconditional lead interest
• A liability for the remainder interest that is assigned to other beneficiaries
LIFE-INTERESTS IN REAL ESTATE
A life-interest in real estate arrangement is a type of a life-contingent irrevocable split-interest agreement in which the donor or parties specified by the donor retains the right to use real estate during the life of the donor.
The assets should be recognized at the onset of the arrangement as either a capital asset or an investment depending on the terms of the arrangement and management’s intent at the time of the donation. A liability should be recognized if a governmental entity assumes a legal obligation pursuant to the provision of the arrangement such as for insurance, maintenance or repairs of the asset. A related deferred inflow of assets should be recognized for the difference between the asset and the liability (if a liability is recognized).
A THIRD PARTY IS THE INTERMEDIARY
This standard is also applicable when a donor irrevocably transfers resources to a third-party intermediary that administers these resources for the unconditional benefit of a governmental entity and at least one other beneficiary. The government has a beneficial interest in its portion of the donated assets.
The government should now recognize assets and a deferred inflow of resources when it becomes aware of the agreement and has sufficient information to measure the beneficial interest, provided all of the following criteria are met:
• The government is specified by name as beneficiary in the legal document underlying the donation
• The donation agreement is irrevocable
• The donor has not granted variance power to the intermediary
• The donor does not control the intermediary
• The irrevocable split-interest agreement establishes a legally enforceable right for the government’s benefit (an unconditional beneficial interest)
About John D'Amico
John D'Amico, CPA, is a Partner within the Professional Standards Group at Marks Paneth LLP, which is responsible for monitoring quality control in the firm as mandated by professional standards. He specializes in pre-issuance reviews and inspections of nonprofit organizations, governments and Single Audits. Mr. D’Amico also provides consultation on accounting and attestation matters and tests and monitors the firm's quality review policies and procedures. He teaches continuing education classes for the firm and on... READ MORE +