Harvard University Policy:

The Life Income Fund is an established fund of securities or other assets that are given to the University in connection with a split-interest agreement that is part contribution and part exchange transaction. The University accepts the contribution and is obligated to make periodic stipulated payments to the donor or a third-party beneficiary for a specified period of time, usually until the death of the donor or third-party beneficiary.

The University's life income funds include pooled funds, gift annuities, and charitable remainder trust funds.

The life income funds are recorded as assets at the fair market value, net of related liabilities for the present value of estimated future payments. These payments are due to beneficiaries and net of obligations under charitable remainder trusts due to other institutions.

The policy on accounting for life income funds defines the accounting treatment and reporting requirements for assets donated to the University with split-interest agreements attached to the use of the funds.

For financial reporting purposes, the University's life income funds include its pooled funds, gift annuities, and charitable remainder trust funds.

Life income funds are established arrangements with donors who make contributions to the University under agreements that the University receives benefits that are shared with other beneficiaries. These arrangements are also known as split-interest agreements.

The AICPA Audit and Accounting Guide for Not-for-Profit Organizations define life income funds (split-interest agreements) as follows:

Split-interest agreements are agreements where a donor makes an initial gift to a trust or directly to the University in which the University has a beneficial interest but is not the sole beneficiary of the trust. The time period covered by the agreement is expressed either as a specific number of years, in perpetuity, or as the remaining life of the beneficiary or beneficiaries. The assets are invested and administered by the University, a trustee, or fiscal agent, and distributions are made to the beneficiary or beneficiaries during the term of the agreement.

At the end of the agreement's term, the remaining assets covered by the agreement are distributed or retained by either the University or another beneficiary.

There are five common life income funds (split-interest agreements):

• Charitable lead trusts

• Charitable remainder trusts

• Charitable gift annuities

• Perpetual trusts held by third parties

• Pooled (life) income funds

The University holds pooled income funds, remainder trust funds, and gift annuity life income funds for approximately 2,400 donors. Generally, the University holds these funds for one or more beneficiaries, pay lifetime income, and receives the principal balance at the end of the term specified in the split-interest trust agreement.

The University records the contribution received under the life income fund agreement as an asset at its fair market value when received. The assets are classified in the financial statements as permanently restricted, temporarily restricted or unrestricted in accordance with FASB No. 116, "Accounting for Contributions Received and Contributions Made," and FASB No. 117, "Financial Statements of Not-for-Profit Organizations."

Contribution revenue recognized under the University's life income fund agreements are classified as increases in permanently restricted, temporarily restricted, or unrestricted net assets. The University also recognizes the liability associated with the agreement to pay an annuity to one or more beneficiaries.

Pooled (Life) Income Funds

 

The University has formed pools with donor's contributions to life income funds. These pooled funds are invested and internally managed as a group by the Harvard Management Company.

Donors are assigned specific number of units based on the proportion of the fair market value of their contributions to the total fair market value of the pooled income fund. The beneficiary or beneficiaries of the funds are paid income for life based on their assigned share of units. The University receives the unit shares upon the death of the beneficiaries.

Temporarily restricted contributions revenue is recognized in the period the assets are received from the donor.

• The revenue should be measured at the fair value of the assets to be received, discounted for the estimated time period until the donor's death.

• The assets should be measured at the fair value when received.

• The difference in the fair value of the assets when received and the revenue recognized should be record as deferred revenue that represents the amount of the discount.

• Income on the fund should be recorded as increases in the liability to the donor or beneficiaries or both.

• Payments to the donor or beneficiaries or both should be recorded as a decrease in the liability.

• The discount is amortized and recognized as a reduction in deferred revenue and as a change in the value of the life income fund that gets reported as a change in temporarily restricted net assets.

• The temporarily restricted net assets are reclassified as an unrestricted net asset upon the death of the beneficiary or beneficiaries.

Remainder Trust (Life) Income Funds

 

The University has remainder trust funds whereby the donor specifies, and the University is obligated to pay, a specific amount to one or more designated beneficiaries over the term of the trust. The amount the beneficiary or beneficiaries receive can be a specific dollar amount or a percentage of the fair value of the trust assets but the obligation is limited to the trust assets. Any assets remaining in the trust at termination, become the property of the University's.

Permanently restricted contributions revenue should be recognized in the period the trust is established.

• The assets held in trust should be measured at the fair value when received.

• A liability is recognized for the present value of the estimated future payments to be distributed to the beneficiary or beneficiaries.

• The revenue is the difference between the fair value of the trust assets and the present value of the estimated future payments

• Income earned on the trust assets fund should be recorded as increases in the liability to the beneficiary or beneficiaries.

• Payments to the donor or beneficiaries or both should be recorded as a decrease in the liability.

• The discount is amortized and recognized as a reduction in the liability and as a change in the value of the trust fund that gets reported as a change in permanently restricted net assets.

The trust assets remain classified as permanently restricted upon the termination of the trust agreement.

The Office of Financial Systems is responsible for writing, updating, and interpreting this policy.

The Financial Deans of the University are responsible for enforcing this policy.

For assistance in interpreting this policy, please call your Tub Financial Office.