As COVID-19 funding is ending, many not-for-profit organizations are wondering what will happen next. Where can organizations receive more funding or contributions and how does an organization tap into a donor base that has constraints on disposable income? In a weakened economy with rising interest rates, identifying new and innovative fundraising efforts is key.

Planned giving can help a not-for-profit organization diversify revenue streams and help serve as a stable revenue source that can be counted on at a future date. It also allows an organization to budget ahead (for planned distributions) and build a buffer against economic turbulence.

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One of the fastest growing areas of planned charitable giving is the use of split-interest agreements. The most common types of split interest agreements are charitable lead trusts, charitable remainder trusts, charitable gift annuities, pooled income funds, and charitable trusts held by a third party.

Charitable lead trust
Under a charitable lead trust, a donor will establish and fund a trust naming a not-for-profit organization as the lead beneficiary. A not-for-profit will receive distribution from the trust until termination of the agreement, at which time the remaining assets will be paid back to the donor or to a beneficiary named by the donor. The benefit of this type of trust is that a nonprofit will get a fixed income stream for a specific term or life of the donor.

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Charitable remainder trust
A charitable remainder trust is one in which a nonprofit organization receives beneficial interest in donated assets after the noncharitable beneficiary has received benefits for a specified period of time. At termination of the agreement, the remaining assets in the trust pass to the nonprofit organization for its use. These contracts usually have a term of 20 years or for life.

Charitable gift annuity
A charitable gift annuity is one in which a donor transfers assets to a not-for-profit organization and receives from that organization a commitment to pay the donor a certain sum each year for life. The donor can take an immediate tax deduction while the nonprofit can invest and grow the funds. When the donor passes away, the nonprofit will potentially be able to recognize an additional contribution.

Pooled income fund
When a donor transfers assets to a fund that pays income from assets to one or more noncharitable beneficiaries for life, this is known as a pooled income fund. Not-for-profits create and maintain these funds and pay a donor an income based on their share of the fund and the performance of the investments. A not-for-profit will receive money from these funds when a participating donor passes away.

Donor advised fund
Another source to consider is a charitable trust held by a third-party also known as a donor advised fund. Some donors may establish and fund a charitable trust that is administered by an individual or entity other than the organization, as beneficiary. The donor will transfer cash or other assets to an independent trustee (such as a bank, trust company, or foundation) and the donor specifies the nonprofit organization that will receive a distribution from the trust assets. This form of agreement differs from the above because all the beneficiaries are charitable organizations.

Each trust agreement will need to be evaluated as the individual agreements can have nuances depending on the intent of the donor. Accounting for a split-interest agreement at inception varies depending on whether the agreement is revocable or irrevocable, the type of agreement it is, and whether the assets are held by the organization or a third party. During the term of the agreement, entries may need to be made to recognize investment income, disbursements to beneficiaries, amortization of the discount for the passage of time, and changes in actuarial valuations.

Amber Bichun

Reach out to Citrin Cooperman’s dedicated Not-For-Profit team to discuss these types of agreements and the related impact to the organization.

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