Thursday, August 4, 2011

What is a Split-Interest Agreement?

Admit it. You think it has something to do with two people splitting the interest income on an investment. Sorry...that's not it.

A split-interest agreement is a way of giving money to a nonprofit organization (also called not-for-profits, or NFPs) where the organization gets some benefits now, and some later. In other words, their interest in the arrangement is split into a lead interest (now) and the remainder interest (later). If I was a rich old guy donating a gazillion dollars to my favorite NFP, I might set it up as an irrevocable split-interest agreement, where they get dividend income now and the full amount of the investment capital at some future date, like when I die. Irrevocable means we can't change the terms of the deal once it's been set up. It's all explained in excrutiating detail in Embedded Derivatives: Application of Statement 133 to a Not-for-Profit Organization’s Obligation Arising from an Irrevocable Split-Interest Agreement, from the FASB (the same folks who brought you GAAP).

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