Split-interest agreements: remainder trusts, lead trusts and gift annuities

In this lesson you will

Identify the common types of split-interest agreements
Measure the contribution and liability when an NFP is trustee or annuity issuer
Classify split-interest revenue and value changes by net asset class
Test the disclosures listed in ASC 958-30-50-1

What a split-interest agreement is

In a split-interest agreement the donor splits the benefit of assets between the NFP and other beneficiaries, such as the donor or family. One party gets payments for a period (the lead interest), and the other gets what is left at the end (the remainder interest). Subtopic 958-30 governs the NFP's accounting.

Common types:

Charitable remainder trust. The trust pays the donor or other beneficiaries for life or a term, then the remainder goes to the NFP. The IRS describes two kinds: an annuity trust pays a fixed dollar amount each year, and a unitrust pays a fixed percentage of the trust's value revalued each year. For both, the payout must be between 5% and 50%, the term is the life of one or more beneficiaries or up to 20 years, and the remainder for charity must be at least 10% of the initial net fair market value of the property placed in trust.
Charitable lead trust. The reverse: the NFP gets payments for a period, and the remainder returns to the donor or other beneficiaries.
Charitable gift annuity. Not a trust. The donor transfers assets to the NFP, which promises fixed payments to the donor for life. In many agreements the assets become part of the NFP's general assets.
Pooled income fund. Many donors' gifts are pooled and invested; each donor or named beneficiary receives a share of the income for life, and the NFP receives the remainder.
Perpetual trust held by a third party. An outside trustee holds the assets forever and pays the NFP the income.

Initial recognition

When the NFP is trustee or holds the assets (a remainder trust it manages, or a gift annuity), it recognizes the assets received at fair value and a liability for the present value of the payments it owes to the other beneficiaries. The difference is contribution revenue. When a third party holds the assets, the NFP recognizes its beneficial interest, measured at the present value of the amounts it expects to receive, once it has an unconditional right to them.

The measurement depends on discount rates, life expectancy tables and payout rates, so these are estimates with real audit risk.

Classification

ASC 958-30-45-1, as amended by ASU 2016-14, classifies contribution revenue under split-interest agreements as an increase in net assets with donor restrictions, unless the donor gives the NFP the immediate right to use what it receives without restriction. The time element alone is enough: the NFP cannot spend the remainder until the agreement ends.

For a charitable gift annuity, ASC 958-30-45-2 reports the contribution as support without donor restrictions only if the donor does not restrict the assets and neither the agreement nor laws and regulations require the assets to be invested until the beneficiary's death. Annuity reserves required by state law do not by themselves create donor restrictions.

During the term, changes in the value of split-interest agreements are classified in the same net asset class used when the contribution was first recognized (ASC 958-30-45-3). Amounts are reclassified to net assets without donor restrictions as distributions are received, unless the donor restricted them further (ASC 958-30-45-4).

Perpetual trusts held by third parties

A bank or other trustee holds assets in perpetuity and pays the income to the NFP. The NFP never controls the corpus. ASC 958-605-45-8 classifies the contribution as donor-restricted support that is perpetual in nature, because the trust is similar to a permanent endowment the NFP does not control, not a multiyear promise to give. Distributions free of purpose or time restrictions are reported as net assets without donor restrictions. Restricted distributions go to net assets with donor restrictions until the time passes or the purpose is met. Confirm the trust's holdings and the NFP's share directly with the trustee each year.

Presentation and disclosure

ASC 958-30-45-6 and 45-7 require split-interest assets and liabilities to be reported separately on the statement of financial position, and contribution revenue and changes in value to be shown as separate lines in the statement of activities, unless those amounts are disclosed in the notes. ASC 958-30-50-1 requires notes covering:

the general terms of existing agreements
recognized assets and liabilities, if not shown separately
the measurement basis used for recognized assets
discount rates and actuarial assumptions, if present value techniques are used
contribution revenue and changes in value, if not shown as separate lines

Audit approach

Obtain each agreement and the trust or annuity statements.
Recompute the present value of the liability or beneficial interest with the stated payout, the current mortality table the NFP uses and its discount rate policy.
Confirm trust assets held by third-party trustees.
For gift annuities, read state reserve rules and test the reserve. ASC 958-30-50-2 requires legally mandated reserves to be disclosed.
Check that changes in value land in the right net asset class.

Worked example

A charitable remainder unitrust at Pine Ridge Conservancy

On January 1, 2026 a donor transfers marketable securities with a fair value of $1,000,000 to a charitable remainder unitrust. Pine Ridge Conservancy is trustee and will receive the remainder. The trust pays the donor 6% of the trust's value each year for life. The donor places no restriction on how Pine Ridge uses the remainder.

IRS requirements: the 6% payout is within the 5% to 50% range, and Pine Ridge's actuary computes the charitable remainder at 38% of the initial value, above the 10% minimum.

Initial recognition: the actuary computes the present value of the expected unitrust payments to the donor at $620,000, using the conservancy's discount rate and a life expectancy table.

Assets held under split-interest agreement: $1,000,000
Liability under unitrust agreement: $620,000
Contribution revenue: $1,000,000 less $620,000 = $380,000

Classification: although the donor did not restrict use of the remainder, Pine Ridge cannot spend it until the donor's death. The $380,000 is net assets with donor restrictions.

At December 31, 2026 the trust's assets are worth $1,040,000 after the first payment and the revalued liability is $610,000. The change in value of the split-interest agreement is ($1,040,000 less $610,000) less $380,000 = $50,000, reported in net assets with donor restrictions.

Self-check

Answer each question before you open the answer.

Under ASC 958-30-45-1, under what circumstance is contribution revenue from a split-interest agreement classified as without donor restrictions?
Show answer
When the donor gives the NFP the immediate right to use, without restrictions, the assets it receives (ASC 958-30-45-1).
What range must the payout rate of a charitable remainder annuity trust fall within under IRS rules?
Show answer
Between 5% and 50% of the initial value of the trust assets.
Does a state-required annuity reserve on a charitable gift annuity create a donor restriction?
Show answer
No. ASC 958-30-45-2 says additional annuity reserves required by state law do not create donor restrictions.
Name two assumptions the notes must disclose if present value techniques are used.
Show answer
The discount rates and the actuarial assumptions used (ASC 958-30-50-1(d)). Readers need them because the recognized amounts move with those inputs.
A bank trustee holds a perpetual trust and pays the income to an NFP. How is the NFP's interest classified?
Show answer
As donor-restricted support that is perpetual in nature (ASC 958-605-45-8). The NFP never controls the corpus, so the trust is treated like a permanent endowment, not a multiyear pledge.

Sources

Back to the syllabus

Standards are paraphrased from the primary sources listed above; read the source before relying on a requirement. This lesson is training material, not professional advice. Report an error