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8.7 Split-interest agreements
Publication date: 27 May 2020
us NFP guide
Split-interest agreements are charitable giving arrangements in which NFPs receive benefits that are shared with other (usually noncharitable) beneficiaries. NP 8.6.2.2 addresses split-interest agreements when the assets are held by a third party and thus subject to the three-party framework. A split-interest agreement is defined in the ASC Master Glossary.
ASC Master Glossary
Split-interest agreement: An agreement in which a donor enters into a trust or other arrangement under which a not-for-profit entity (NFP) receives benefits that are shared with other beneficiaries. A typical split-interest agreement has the following two components:
- A lead interest
- A remainder interest.
The accounting requirements for the recognition, measurement, and presentation of split-interest agreements are provided in ASC 958-30, Split interest agreements. ASC 958-30-55-30 provides an illustration of journal entries for accounting for the following types of split-interest agreements:
- Charitable lead trusts
- Charitable remainder trusts
- Charitable gift annuities
- Pooled (life) income funds
8.7.1 General characteristics of split-interest agreements
In a typical split-interest agreement, a donor makes a gift by transferring assets to either a third-party (for example, an intermediary NFP or bank trust department) or directly to the NFP (depending on the type of agreement). The donated assets are invested and administered for the term of the arrangement (e.g., a fixed period, the lifespan of a specified individual, or in perpetuity) and periodic distributions are made in accordance with the donor’s request.
The time period covered by the agreement typically is expressed either as a specific number of years or as the remaining life of an individual or individuals designated by the donor. Based on the donor’s instructions in the trust instrument, the NFP may ultimately have unrestricted use of the resources to which it is ultimately entitled from the trust, or the donor may place time or purpose restrictions on their use.
Arrangements structured as charitable gift annuities (NP 8.7.3) and pooled (life) income funds (NP 8.7.4) are administered directly by the NFP charitable beneficiaries. Charitable lead and remainder trusts can be administered by either the NFP beneficiary or an independent third-party.
In charitable lead or charitable remainder trust arrangements, the NFP beneficiary will have either the right to distributions during the agreement’s term (the lead interest) or the right to the assets remaining at the end of the agreement’s term (a remainder interest). Ultimately, all the contributed assets together with the associated investment return will be “split” among the beneficiaries, after which the trust terminates. The accounting requirements depend primarily on the nature of the NFP’s interest (lead or remainder) and on whether the NFP or an independent third party serves as trustee.
8.7.2 Lead and remainder trust arrangements
Generally, an NFP recognizes contribution revenue and the related assets and liabilities when an irrevocable split-interest agreement naming it trustee or fiscal agent is executed.
When split-interest trusts are irrevocable and the donor has not retained the right to substitute another charitable beneficiary, the NFP has an unconditional right to the benefits represented by the charitable portion of the trust, which will be reported as contribution revenue by the NFP.
The portion representing contribution revenue for the NFP depends on whether the NFP holds the lead interest (the right to distributions during the agreement’s term) or the remainder interest (the right to the assets remaining at the end of the agreement’s term).
- Charitable lead trust. In a charitable lead trust arrangement, the NFP will have the rights to the trust’s distributions during the agreement’s term. Upon termination of the trust (typically upon the death of the donor), the remainder of the trust assets returns to the donor or is distributed to (usually) noncharitable beneficiaries designated by the donor. Examples include charitable lead annuity trusts (CLATs) and charitable lead unitrusts (CLUTs)
- Charitable remainder trust. In a charitable remainder trust, the NFP will have the right to the assets remaining in the trust at the end of the agreement’s term (i.e., once the payment of the lead interest ceases). Examples include charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). Some CRUTs limit the annual payout to the lesser of the stated percentage of or the actual income earned.
8.7.2.1 NFP is the trustee–accounting at inception
When the NFP holds the assets and administers the trust, its balance sheet reflects the trust assets along with the trust’s liability for the obligation to make future payments to the other beneficiary (or beneficiaries) (see NP 8.6.2.2 for circumstances where the NFP does not hold the assets). The obligation to make payments is limited by the amount of assets in the trust. If the assets in the trust are exhausted, the trust terminates, and the NFP has no further responsibility. Thus, the liability is considered a liability of the trust, not a general obligation of the NFP.
At initial recognition, the difference between the fair value of the assets received and the fair value of the liability to the other beneficiaries is recognized as donor-restricted contribution revenue. That liability might relate to the lead interest (if the other beneficiary has the right to periodic payments from the trust assets during the term of the agreement), or it might pertain to a single payment representing the remainder interest (if the other beneficiary has the right to the assets remaining at the end of the agreement’s term).
Appendix A of chapter 6 of AAG-NFP contains excerpts from an AICPA white paper, Measurement of Fair Value for Certain Transactions of Not-for-Profit Entities, that are relevant to measurement of split-interest agreements. Paragraphs 67 through 102 of that white paper address the application of ASC 820-10-35 in determining the fair value of contribution revenue and the obligation to other beneficiaries under split-interest agreements. If present value techniques are used to measure fair value, the liability is generally measured at the present value of the future payments to be made to the other beneficiaries. Any present value technique for measuring the fair value of the contribution or payments to be made to other beneficiaries must consider the estimated return on the invested assets during the expected term of the agreement, the contractual payment obligations under the agreement, and a discount rate commensurate with the risks involved.
The contribution portion of the agreement may be subject to explicit donor-imposed restrictions relating to time or purpose. In addition, the contribution is usually subject to an implied time restriction.
The obligations for certain split-interest arrangements will contain embedded derivatives. Identifying those situations and the accounting applied in them is discussed at NP 8.7.2.3.
8.7.2.2 NFP is trustee–subsequent accounting
At each reporting date, trust assets are remeasured based on the guidance discussed in NP 9 for investment accounting.
Distributions to the lead beneficiary (either the NFP itself in a lead trust or to the other beneficiary, if a remainder trust) are made in accordance with the terms indicated by the donor (for example, based on a fixed annuity amount or a percentage of the fair value of the trust assets). If the NFP holds the lead interest, it reflects the periodic reduction of trust assets associated with the distributions along with corresponding increases in assets that belong to the NFP. Reclassifications from net assets with donor restrictions to net assets without donor restrictions are made in connection with each distribution (assuming the donor imposed no other time or purpose restrictions). If the non-charitable beneficiary holds the lead interest, the distribution from trust assets also will reduce the liability to the other beneficiary.
The NFP does not reflect the trust’s investment return in its statement of activities because it possesses an undivided interest (i.e., non-exclusive claim) in the assets, which is shared among all beneficiaries. Thus, investment return (including the change in fair value of the trust assets) is reported as an increase or decrease in the obligation to other beneficiaries. The liability to the other beneficiary(ies) is remeasured at the same time as the assets, resulting in a net adjustment.
In accordance with ASC 958-30-35-6, the NFP has two choices for remeasuring the liability. It can elect the fair value option pursuant to ASC 825-10-25 (and thus, remeasure the obligation at fair value). If that is done, the NFP would use the same fair value measurement technique that was used at inception. If fair value is based on the present value of payments to be made, the NFP updates all the assumptions, including the discount rate, to reflect current market conditions. Alternatively, the NFP can amortize the discount associated with the obligation (in a remainder trust) or contribution (in a lead trust) and adjust for changes in life expectancies (if payments are life dependent); in this case, the discount rate is not revised after initial recognition. The changes resulting from remeasuring the liability are reflected in the statement of activities as change in value of split-interest agreements, which increases or decreases donor-restricted net assets.
According to AAG NPO 6.35, the preferred approach is to remeasure the liability at fair value.
When the lead interest terminates (typically upon the death of the non-charitable beneficiary), the assets in the trust are distributed to the remainder interest beneficiary, the asset and liability accounts are closed (i.e., the trust terminates), and any difference between those balances is recognized as a change in the value of split-interest agreements in the net assets with donor restrictions class. If the NFP holds the remainder interest, a reclassification from net assets with donor restrictions to net assets without donor restrictions would be made upon the distribution from the trust, if no other donor-imposed time or purpose restrictions on use of the assets exists.
8.7.2.3 Derivatives embedded in split-interest liabilities
As discussed in NP 8.7.2.2, when an NFP charitable beneficiary also serves as trustee for a lead or remainder split-interest agreement, the NFP’s balance sheet reflects trust assets along with a liability for the obligation to make future payments to the other beneficiary (or beneficiaries). That liability might relate to the lead interest (if the other beneficiary has the right to periodic payments from the trust assets during the term of the agreement), or it might be a single payment representing the remainder interest (if the other beneficiary has the right to the assets remaining at the end of the agreement’s term).
If the amount of the NFP’s obligation is directly affected by changes in the value of the assets in the trust (as explained in NP 8.7.2.4), the liability contains an embedded derivative that may need to be accounted for separately. In those circumstances, the obligation would be considered a hybrid instrument under ASC 815-15, Embedded derivatives, consisting of a “debt host contract” and the embedded derivative, as described in ASC 958-30-35-7. The embedded derivative must be measured at fair value as required by ASC 815-10-30-1 (for initial measurement) and ASC 815-10-35-1 (for subsequent measurement). In order to accomplish that, it may be necessary to separate the embedded derivative from the host contract.
Excerpt from ASC 958-30-35-7
The debt host contract is the liability for the payment to the beneficiary that would be required if the fair value of the trust assets does not change over the specified period. The embedded derivative represents the liability (or contra-liability) for the increase (or decrease) in the payments to the beneficiary due to changes in the fair value of the trust assets over the specified period.
8.7.2.4 Arrangements that contain embedded derivatives
If the NFP’s obligation is to make a single payment to the other beneficiary for the assets remaining at the end of the agreement’s term (as in a CLAT or CLUT), the liability amount will always be affected by the performance of the investments over the trust’s term. Because the obligation is directly affected by changes in the value of the assets in the trust, all remainder interest obligations contain an embedded derivative.
On the other hand, if the NFP’s obligation is to make periodic payments to the lead beneficiary during the term of the agreement, the payment amounts will either be fixed (as in a CRAT) or variable (as in a CRUT). When the lead beneficiary is entitled to a fixed annuity payment throughout the agreement’s term, the amount of the NFP’s liability is unaffected by changes in the value of the trust assets. Therefore, no embedded derivative is present in a CRAT. However, if the payment amounts are based on a percentage of the fair value of the trust assets on a given date (and thus, can vary from period to period), the amount of the NFP’s liability is directly affected by changes in the value of the trust assets. In a CLUT, therefore, the NFP’s obligation will contain an embedded derivative.
8.7.2.5 Accounting for embedded derivatives
Embedded derivatives must be bifurcated from the debt host liability and accounted for separately unless either:
- The term of the split-interest agreement is based on the remaining life of an individual or individuals designated by the donor (see NP 8.7.1). In that situation, because the requirement to make payments ceases upon the death of the individual (in a charitable remainder trust) or the requirement to make a payment is activated upon the death of the individual (in a charitable lead trust), the arrangement is considered “life contingent.” Life-contingent contracts are outside the scope of ASC 815 and thus are not subject to the requirement to separately identify any derivative that might be embedded within the obligation (see ASC 958-30-25-8). The scope exception for life-contingent arrangements is described in ASC 815-10-15-52 through ASC 815-10-15-57.
- The derivative’s risks and characteristics are “clearly and closely related” to those of the “host,” which would be unlikely in light of the nature of these arrangements. DH 4.3.1 provides information on evaluating whether risks and characteristics are clearly and closely related.
If an arrangement containing an embedded derivative does not qualify for the life-contingent exception, most NFPs will elect to report the entire amount of the obligation to the other beneficiary at fair value, rather than separately accounting for the host contact and the embedded derivative. The NFP could make the election pursuant to a fair value option for hybrid instruments described in ASC 815-15-25-4, or based on the general fair value option for financial instruments described in ASC 825-10.
ASC 958-30-55-6 through ASC 958-30-55-20 provide eight examples (identified as Cases A through H) illustrating and explaining the analyses for potential embedded derivatives under various split-interest agreement structures. The conclusions for each type of arrangement are summarized in Figure NP 8-4.
Figure NP 8-4
Accounting for embedded derivatives in various split-interest structures
Accounting for embedded derivatives in various split-interest structures
Nature of NPO’s obligation
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Nature of payments to lead beneficiary
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Term of agreement
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Life contingent
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Period certain
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Period certain and life contingent
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Payment of remainder interest
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Either fixed or variable (CLAT or CLUT)
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Periodic payments to lead interest
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Fixed (CRAT)
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Variable (CRUT)
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See AAG-NFP 6.36 through AAG-NFP 6.37 for additional information on accounting for embedded derivatives.
8.7.2.6 Practical considerations when evaluating embedded derivatives
Before undertaking an analysis for a specific split-interest agreement, an NFP should consider whether any of the following circumstances apply to that arrangement. If so, the NFP does not need to assess whether the arrangement contains an embedded derivative.
- The NFP has made an election to measure the obligation to make future payments to the other beneficiary subsequent to inception using the fair value option described in ASC 825-10. As discussed in NP 8.7.2.2, this is the approach recommended by AAG-NFP 6.35 for subsequent measurement of all split-interest agreements. If this election has been made, any embedded derivative that might be present in the arrangement is already reported at fair value, so there would be no need to separately identify and account for it.
- The term of the split interest agreement is based on the remaining life of an individual or individuals designated by the donor. As discussed in NP 8.7.2.5, the obligation to the other beneficiary in this type of agreement is considered “life contingent” and thus is not subject to the requirement to separately identify any derivative that might be embedded within it.
- The agreement is structured as a charitable remainder annuity trust (CRAT). Under a CRAT, the NFP’s obligation is to make fixed annuity payments throughout the agreement’s term to the other beneficiary. Regardless of whether the term is period certain or life contingent, the amount of the NFP’s obligation is unaffected by changes in the value of the trust’s assets and thus, no embedded derivative exists. Although the analysis is slightly different if the arrangement’s term is based on the longer of the beneficiary’s remaining life or a specified period (and thus is both period-certain and life contingent), there is no need to evaluate the arrangement for an embedded derivative.
8.7.3 Charitable gift annuity
A charitable gift annuity is an arrangement between a donor and an NFP in which the donor contributes assets directly to the NFP in exchange for a promise by the NFP to pay a fixed amount for a specified period to the donor, or to individuals or organizations designated by the donor. The agreements are like charitable remainder annuity trusts, except that no trust exists, the assets received are held as general assets of the NFP, and the annuity liability is a general obligation of the NFP.
Figure NP 8-5 highlights the financial reporting differences between trust and non-trust charitable remainder arrangements.
Figure NP 8-5
Comparison of charitable remainder trusts to charitable gift annuities
Comparison of charitable remainder trusts to charitable gift annuities
Charitable remainder trust
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Charitable gift annuity
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Unless either (a) the donor has imposed purpose or time restrictions on the gift, or (b) the gift agreement or laws and regulations require the assets received by the NFP to be invested until the income beneficiary's death, the contribution portion of a charitable gift annuity increases net assets without donor restrictions.
Actuarial changes in the annuity liability are recognized as changes in the value of split-interest agreements and classified consistent with the classification used when the contribution income was recognized initially.
State laws may require establishment of annuity reserves or other limitations on the NFP, such as limitations on the way some resources are invested. If so, those matters need to be disclosed in the notes to the financial statements.
Some NFPs voluntarily set aside additional reserves for unexpected actuarial losses. These may be presented as a separate component of board-designated net assets on the face of the statement of financial position (see NP 2) or disclosed in the notes.
8.7.4 Pooled life income fund
Some NFPs form, invest, and manage pooled (or life) income funds. These funds are divided into units, and contributions of many donors’ life income gifts are pooled and invested as a group. Donors are assigned a specific number of units based on the proportion of the fair value of their contributions to the total fair value of the pooled income fund on the date of the donor’s entry to the pooled fund. The donor (or another designated beneficiary) holds a life interest in the income earned (as defined under the arrangement) on those units. Upon the donor’s death, the value of these assigned units reverts to the NFP. The accounting for pooled (life) income funds is an exception to the general rule that when the NFP has control over the assets, the contribution revenue is the residual amount, i.e., the difference between the liability to the other beneficiaries and the fair value of the assets received. Thus, in these arrangements, the “split” between benefits for the NFP and benefits for the noncharitable beneficiaries is accomplished differently.
When the assets are received from the donor, the NFP increases assets of the pooled (life) income fund and credits both donor-restricted contribution revenue (a calculated amount) and deferred revenue (the residual amount). Contribution revenue is calculated as the fair value of assets to be received, discounted for the time period until the donor’s death. The deferred revenue is the residual resulting from subtracting contribution revenue from the assets received. The deferred revenue represents the time value of money, or the amount of the discount.
Until the donor's death, the donor (or the donor's designated beneficiary or beneficiaries) is paid the actual income (as defined under the arrangement) earned on the donor's assigned units in the pool. Subsequent to initial recognition, earnings on the assets are offset with liability to the beneficiary(ies). Those earnings and the periodic disbursements to the beneficiary are reported as increases and decreases in the liability to the beneficiary. The amortization of deferred revenue is reported in the statement of activities as change in value of split-interest agreements. Upon the death of the income beneficiary, the unamortized deferred revenue is also recognized as change in value of split-interest agreements.
8.7.5 Revocable charitable gifts
ASC 958-30-25-2 addresses the accounting for a gift agreement that is not irrevocable.
Revocable split-interest agreements shall be accounted for as intentions to give. Assets received by a not-for-profit entity (NFP) acting as a trustee under a revocable split-interest agreement shall be recognized when received as assets and as a refundable advance. If those assets are investments, they shall be recognized in conformity with Section 958-320-25, 958-321-25, or 958-325-25, as appropriate. Contribution revenue for the assets received shall be recognized when the agreement becomes irrevocable or when the assets are distributed to the NFP for its unconditional use, whichever comes first.
8.7.6 Split-interest agreements presentation and disclosure
According to ASC 958-30-45-7, contribution revenue and changes in the value of split-interest agreements should be presented as a separate line item in a statement of activities or the related notes.
Assets and liabilities recognized under split-interest agreements, if material, should be presented separate from other assets and liabilities in the balance sheet or disclosed in the notes (see ASC 958-30-45-6).
8.7.7 Special types of split-interest remainder trusts
ASC 958-30 and AAG-NFP chapter 6 contain in-depth discussions of two widely used forms of remainder trusts: charitable remainder annuity trusts and charitable remainder unitrusts. However, there are many varieties of remainder trusts which are not discussed in either authoritative GAAP or the AICPA guide. When nonstandard forms of trusts are encountered, the underlying concepts in ASC 958-30 should be applied based on the facts and circumstances of the specific arrangement.
8.7.7.1 Net Income Remainder Trust (NIRT)
In a NIRT, the actual income of the trust is paid to the lead beneficiary. The calculations associated with computing the beneficial interest in a NIRT are like those for CRATs and CRUTs, except that the expected payout amount used in the cash flow projections will be based on the income expected to be generated by the trust assets (as contrasted to a CRAT’s fixed payment amount or a CRUT’s percentage of asset values). A key consideration with NIRTs is how the trust agreement defines “income.” If “income” includes all dividends, interest, rents, and net capital appreciation, the amount of cash available to be distributed to the charity when the lead interest terminates will be the amount originally contributed to the trust. If “income” is more narrowly defined to include only dividends, interest, and rents, the net capital appreciation accrues to the NFP’s interest, and the estimated rate of return (growth factor) must be factored into the calculations in estimating the fair value of the remainder interest the charity will ultimately receive.
8.7.7.2 Net Income Principal Invasion Remainder Trust (NIPIRT)
Like a NIRT, a NIPIRT pays the income earned by the trust to the lead beneficiary; however, in addition, the trustee (at his or her discretion) can also make principal distributions to the lead beneficiary. In substance, this is a split-interest agreement where the trustee has variance power (see NP 8.6). Because the trustee has the discretion to potentially distribute all the trust assets to the lead beneficiary, the charity does not have an unconditional right to cash flows from the trust. In accordance with ASC 958-30-25-18, NIPIRTs should be accounted for similar to conditional promises to give; that is, we believe no asset or contribution revenue should be recorded until the lead interest terminates and the amount of remainder interest becomes known.
Excerpt from ASC 958-30-25-18
However, if the trustee or fiscal agent has variance power to redirect the benefits to another entity or if the NFP’s rights to the benefits are conditional, the NFP shall not recognize its potential for future distributions from the split-interest agreement until the NFP has an unconditional right to receive benefits under the agreement.
8.7.7.3 Limited Net Income Principal Invasion Remainder Trust
A limited NIPIRT similarly pays the lead beneficiary the earnings of the trust; however, the trustee’s discretionary authority to invade principal is limited to a specified maximum annual amount. Under a limited NIPIRT, a portion of the remainder interest will be contingent on the extent to which the trustee makes (or does not make) distributions from principal. However, it is possible for the NFP to estimate the maximum principal invasion (and thus, the minimum value of the remainder interest) based on the maximum annual distribution amount and the expected lifespan of the noncharitable beneficiary. The NFP’s right to receive the minimum value of the remainder interest is unconditional; thus, a beneficial interest in a limited NIPIRT should initially be recorded based on the minimum value of the remainder interest at the time the NFP is notified of the trust’s existence. Subsequently, the value of the split-interest should be adjusted based on the pattern of actual principal distributions (if any) that are made by the trustee.
8.7.7.4 “Lead-and-Remainder” Trust
Under this type of trust, the NFP is the beneficiary of both the lead and the remainder interests. In essence, this is a term endowment held by a third party. The NFP receives the income earned from the trust assets during the life of the trust; when the trust term expires, the NFP receives the remaining assets. The most accurate valuation technique to use in recording a beneficial interest in this type of trust is a present value technique that discounts the stream of estimated annual payments and eventual distribution of the remainder interest.
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