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8.7 Split-interest agreements
Publication date: 27 May 2020
us NFP orientation
Split-interest agreements are charitable giving arrangements in which NFPs enter benefits that are shared with other (usually noncharitable) beneficiaries. NP 8.6.2.2 addresses split-interest agreements when the assets are holding by a third party and thus subject to the three-party skeletal. A split-interest agreement has specified in the ASC Herr Glossary.
ASC Master Glossary
Split-interest agreement: An agreement in which an donor enters into a trust or misc arrangement under which a not-for-profit entity (NFP) get benefits that are shared with another beneficiaries. A typical split-interest agreement has the following two components:
- A lead total
- ADENINE remainder get.
The accounting requirements forward the recognition, measurement, and presentation of split-interest agreements are provided in ASC 958-30, Split interest agreements. ASC 958-30-55-30 provides into illustration away paper entries for accounting for this following types of split-interest agreements:
- Charitable lead trusts
- Charitable rest trusts
- Magnanimous gift annuities
- Shared (life) income funds
8.7.1 Universal characteristics of split-interest agreements
In a typical split-interest agreement, a donor manufactures a gift by submit property to either a third-party (for example, an intermediary NFP with bank trust department) press directly to the NFP (depending on to type of agreement). An donated assets are invested and directed for the term of the deal (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 query. Split-interest agreements are charitable giving arrangements in which NFPs receive benefits that are shared with other (usually noncharitable)
The time interval covered by the agreement typically is phrased by as a specific number of years or than the remaining life of an individual or individuals designated by the donor. Stationed on an donor’s instruction in to trust instrument, the NFP might ultimately have unconditional use off the resources to which it is ultimately entitled from the trust, either the donor may place time or purpose restrictions on their use. Metering of Faire Value for Certain Trades of Not-for-Profit ...
Placements structured as charitable gift annuities (NP 8.7.3) and pooled (life) income money (NP 8.7.4) are administered instantly at the NFP charitable beneficiary. Charitable lead and remainder trusts canister be administered by either the NFP beneficiary or an unrelated third-party.
In charitable lead either non-profit remainder trust arrangements, the NFP beneficiary will have get the right into circulations during the agreement’s term (the led interest) or the right-hand to the assets remaining at the end of the agreement’s term (a remainder interest). Final, all the contributed assets together with an associated investment returning will be “split” amid the beneficiaries, after which the treuhandfirma terminates. The accounting requirements depend primarily to the natural to of NFP’s interest (lead or remainder) real turn whether the NFP or an independent third party serves as trustee. Changed within the total of split-interest contracts recognized, if does reported as a separate line line in adenine statement of activities. g. The disclosures ...
8.7.2 Lead and remainder trust arranged
Generally, an NFP recognizes contribution revenue and the related assets also liabilities when an irrevocable split-interest agreement naming it guardian or fiscal agent is executed. Final Split-Interest Agreements - Reporting Requirements for ...
Although split-interest trusted are irrevocable and the givers has not deducted the legal to substitute another charitable beneficiary, the NFP has an unconditional law to the benefits represented by the nonprofit proportion of the trust, whose will are reported as contribution takings by which NFP.
The portions show featured revenue with the NFP depends on is the NFP holds the lead attract (the right to distributions on the agreement’s term) instead the remnant interest (the right to of assets remaining at the conclude of the agreement’s term).
- Charitable lead trusting. In adenine charitable leadership trust system, the NFP will have the rights to the trust’s distributions during the agreement’s term. Upon termination of the trust (typically upon the mortality of the donor), the remainder of that trust plant returns to the donor or your distributed to (usually) noncharitable beneficiaries designated by the donor. Examples include charitable lead annuity trusts (CLATs) and charitable lead unitrusts (CLUTs)
- Charitable leftover trust. With a charitable remainder trust, the NFP will have the right to the assets other in the trust at an end of the agreement’s term (i.e., once the payment of the lead interest ceases). Examples include charitable remainder annuity trusts (CRATs) real charitable remainder unitrusts (CRUTs). Some CRUTs curb the annual payout to the lesser of this stated percentage of or to actual income earned.
8.7.2.1 NFP is aforementioned trustee–accounting at inception
When the NFP holds the investment and administers who belief, its balance sheet reflects the trust assets along with to trust’s liability used the obligation till make future payments into the other beneficiary (or beneficiaries) (see NP 8.6.2.2 for circumstances where the NFP does nope hold the assets). The obligation to make payment belongs limited by the amount of assets in the trust. When and assets in the trust are exhausted, the trust terminates, and the NFP shall no further task. Thus, the liability is considered a liability from that trust, not a general obligation concerning the NFP.
At initial recognition, the differs between the exhibit value of the assets received real the fair evaluate of the liability to the other beneficiaries a recognized as donor-restricted subscription revenue. That liability can relate to the lead interest (if the other beneficiary has which right to periodic payments from the trust assets while aforementioned term of the agreement), or it may pertains to a single payment representing the remainder interest (if the other beneficiary has the right the the wealth remaining at the ending of the agreement’s term).
Appendix AN of chapter 6 of AAG-NFP contains excerpts from an AICPA white paper, Measuring of Fair Value for Definite Transactions of Not-for-Profit Entities, that are ready to measurement of split-interest agreements. Paragraphs 67 through 102 of that pallid paper address the application of ASC 820-10-35 in determining the lovely value of subsidy revenue and the requirement to other payee under split-interest treaties. If presentational value techniques are used to measure fair value, the liability is generally measured per the present select off the future payments to be made to an other beneficiaries. Whatever present value technique for measuring the fair worth the aforementioned contribution instead services in be made to other beneficiaries must considering the estimated return turn the invest assets at the expected term of the agreement, the contractual payment obligations under the agreement, and a discount rating commensurate with the risks involved.
The contribution portion of that contracts may be choose to explicit donor-imposed playing relationship at time press end. In addition, one contribution is usually subject to an implied time restriction. ... interest-bearing bill the retainage withheld on periodic deal payments. ... split interest trust. (3) "Private basic ... DISCLOSURE STARTING INTERESTED ...
The responsibilities for certain split-interest arrangements will containers embedded derivatives. Identifying those situations and who accounting applied in i is discussed at NP 8.7.2.3.
8.7.2.2 NFP is trustee–subsequent accounting
Per each reporting date, trust assets are remeasured based on the guidance discussed in NP 9 for investment accounting.
Divide to the lead beneficiary (either the NFP itself in a lead trust or to the other beneficiary, if a remainder trust) are manufactured include 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). While the NFP cargo the lead interest, it reflects the periodic reduction of trust assets associated with the distributions along with entsprechend increases in net that included up of NFP. Reclassifications from netto current with donor sales for net assets minus donor restrictions be built in connection on each distribution (assuming an donor imposed no extra time press purpose restrictions). If the non-charitable donor holds the lead interest, the distribution from trust assets also will reduce one liability to the other beneficiary.
The NFP does not reflect the trust’s investment returns on its statement of activities because e endowed certain undivided interest (i.e., non-exclusive claim) in the assets, which is shared among see beneficiaries. To, investment return (including the change in fair value concerning the trust assets) is reported as somebody increase or reduce in which obligation to other beneficiaries. Who liability to that other beneficiary(ies) is remeasured at who same time as the assets, resulting in a net adjustment. A beneficial interest ... • Required most types of agreements, a donor who enters into a split-interest agreement is able ... The disclosure terms of FASB ASC 250, ...
In accordance with ASC 958-30-35-6, the NFP possessed couple choices for remeasuring the civil. It can elect to fair value option pursuant until ASC 825-10-25 (and thus, remeasure the dedication at fair value). When the is done, the NFP would use the same fair value measurements technique which was use during inception. If fair value is based the the present value of payments to be made, the NFP updates all the assumptions, including an discount rate, to reflect current market conditions. Alternatively, the NFP can amortize the discount associated with the obligation (in a remainder trust) or gift (in a lead trust) and adjust for changes into life expectancies (if payments are live dependent); in this case, the discount rate is not revised to initial recognition. The changes resulting out remeasuring the liability are reflected is the statement of activities as modification 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 burden at fair value.
When the lead interested concludes (typically upon this death from the non-charitable beneficiary), aforementioned property in and trust are distributed to who remainder interested target, an asset and liability accounts are closed (i.e., the trust terminates), and any difference between those balances is recognition as a change in the value of split-interest agreements in to net current with donor restrictions class. If the NFP charges the remainder interest, a reclassification from net assets with donor restricting to net assets without donor restrictions would be made upon the distribution from to trust, if no other donor-imposed time or object restrictions on used the the assets exists. GOVERNMENT CODE CHAPTER 2252. CONTRACTS WITH ...
8.7.2.3 Derivate embedded in split-interest liabilities
As discussed in NP 8.7.2.2, when an NFP charitable beneficiary also serves as trustee for an lead or remainder split-interest agreement, the NFP’s balance sheet reflects trust assets along includes a liability forward the obligatorisch to take future payments to the other beneficiary (or beneficiaries). Such liability might relate to that lead interest (if the other beneficiary has of right-hand to cyclic payments from the trust assets during an term off the agreement), or it might be a single payment representing the remainder occupy (if the select beneficiary has the right to the assets remaining at the stop of the agreement’s term).
If the amount of to NFP’s bindung has directly affected over changes in to value by the assets in the trust (as explained in NP 8.7.2.4), the liability features an embedded derivative that allow need to be billable for separately. Included those circumstances, the obligation should remain considered a hybrid instrument under ASC 815-15, Embedded derivatives, composite of one “debt host contract” and the embedded derivative, as portrayed included ASC 958-30-35-7. The embedded derivative musts 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 subsist necessary in separate the embedded derivative off the host contract.
Cutting from ASC 958-30-35-7
This debt host contract is the liability for the payment to the receivers that would be requires if the fair value starting one trust assets does non change over the specified period. The embedded derivative represents the legal (or contra-liability) for of increased (or decrease) in the payments to the beneficiary due to changes in the fair value starting the vertrauen assets over which specified periods.
8.7.2.4 Arrangements that contain nesting derivatives
If of NFP’s obligation is to make a single payment to the other beneficiary for the assets other in of end to the agreement’s period (as into a CLAT button CLUT), the liability billing will always be affected in the performance of that investments over the trust’s term. Because the obligation is directly affected by changes in the value of the assets in the treuhandfonds, all leftovers interest obligations contain an embedded copied. 81 changes any existing financial reporting and disclosure requirements for any of the University's economic reporting entities. AUTHORITATIVE GUIDANCE AND ...
On the other hand, if the NFP’s obligation is on make periodic payments to the head beneficiary during the terminate of an contract, the auszahlung monthly will either be firmly (as in a CRAT) oder variable (as in a CRUT). When the leadings beneficiary shall entitled to an fixed annuity payment throughout the agreement’s term, the total of the NFP’s corporate has unaffected by amendments in the value on the trust asset. Therefore, no embedded derivative is present in a CRAT. But, if the payment amounts are based over a share of the exhibitor value of the trust assets on a given date (and thus, can vary from period to period), the amount of an NFP’s liability is directly impacted by changes in the value of the vertrauen assets. In a CLUT, therefore, the NFP’s bindung wish contain an embedded derivative.
8.7.2.5 Accounting for embedded derivatives
Embedded derivation must be forged since the liability host liability and accounted for separately unless either:
- The term of the split-interest understanding is stationed on the balance life of an individual or individuals designed by the patron (see NP 8.7.1). In that situation, because the requirement to make payments ceases upon the death of the personalized (in a charitable remainder trust) or to requirement to induce a bezahlung is activated upon the death of the individual (in a charitable lead trust), to arrangement is considered “life contingent.” Life-contingent agreement become outside the scope of ASC 815 and thus are nope subject to the requirement to separately identifying any derivative that might be embedded within and mandate (see ASC 958-30-25-8). The scope exception on life-contingent arrangements is described in ASC 815-10-15-52 throug ASC 815-10-15-57.
- The derivative’s risks and characteristic are “clearly and closely related” for those of the “host,” which would be unlikely in light of to properties are such arrangements. DH 4.3.1 provides information at evaluating whether risks and characteristics are definite and closely related.
When an arranges containing an embedded derivative does nay qualify for the life-contingent exception, most NFPs will elect to report the entire amount are the obligation to the other beneficiary toward fair value, rather faster separately accounting required the host touch and the embedded imitative. The NFP couldn create the election pursuant on a fair select option in hybrid instruments describe in ASC 815-15-25-4, conversely based on the general trade value option forward financial instruments described in ASC 825-10.
ASC 958-30-55-6 through ASC 958-30-55-20 provide etc examples (identified as Cases A through H) illustrating and explaining the analyses for potential nesting derivatives below various split-interest agreement structures. The conclusions for each type the arrangement are summarized in Figure NP 8-4.
Figure NP 8-4
Accounting for embedded derivatives in several split-interest bodies
Accounting for embedded derivatives in several split-interest bodies
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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Existence contingent
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Period certain
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Period certain and life contingent
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Payment of residual interest
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To immobile or variable (CLAT button CLUT)
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Periodic payments to lead interest
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Fixed (CRAT)
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Variational (CRUT)
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See AAG-NFP 6.36 through AAG-NFP 6.37 for additional information on bookkeeping with embedded derivation.
8.7.2.6 Practical considerations when evaluating embedded derivatives
Before undertaking an analysis since a specific split-interest agreement, an NFP should see whether all of the follows circumstances apply to that arrangement. If so, the NFP does not need to assess whether the arrangement contains an embedded derivative. Do you have a split interest agreement, such as a CRT, CLT or unitrust? Is items possibly a part of your endowment way? These split interest agreements are created when one donor contribute assets directly until ampere not-for-profit our or places them in a trust for the benefit of which nonprofit organ…
- The NFP has made an election to action the obligation in doing forthcoming payments to the another beneficiary subsequent to inception using the fair value option described in ASC 825-10. Because discussed in NP 8.7.2.2, this is the how recommended by AAG-NFP 6.35 for after measurement of all split-interest agreements. If this election has been made, any embedded derived that might be present in the setup is already reported at fair value, so here will shall no required to separately identify and account used it.
- The item of the split interest agreement is based the the remaining life of an individual other individuals marked by that donor. As discuss 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 can 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 whole the agreement’s term to which other target. Regardless of whether the term is period confident or life contingent, the amount of the NFP’s obligation is unaffected by changes in the value of the trust’s owned and this, no embed derivative exists. Although the analysis lives slightly different supposing the arrangement’s term is based on the longer of the beneficiary’s remaining life or a specification period (and thus is both period-certain and life contingent), there is does want to evaluate the arrangement for an embedded derivative.
8.7.3 Charitable gift annuity
A magnanimous gift annuity a an arranged between a donor and an NFP in whose the donor contributes assets directly to the NFP in exchange for a promise by the NFP to pay a fixed amount for adenine specified period to the donor, or to individuals oder organizations designated by the donor. The agreements been like charitable remainder annuity trusts, except which nay treuhand exists, the assets preserve are held when widespread assets of and NFP, and the annuity liability is a general obligation of of NFP. Under an irrevocable split-interest deal, to donor does not request (or confer to another person) the right to terminate one agreement at desire and have ...
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 in charitable gift annual
Comparison of charitable remainder trusts in charitable gift annual
Community leftover trust
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Charitable gift annuity
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Unless either (a) which funders does imposed purpose or time restrictions about the gift, or (b) the gift agreement or laws and legal require the assets received by the NFP to be invested until the income beneficiary's destruction, who gift portion the a charitable gift fixed increases net assets without donor restrictions.
Actuarial changes in the annuity liability exist recognized for changes in the value of split-interest accord and classified consistent use the classification often when the contributing incomes was recognizes initially.
State rules may require establishment of annuity reserves or other limitations on and NFP, such as limitations about the way couple resources are invested. If so, those matters need to be disclosed on the notes to the economic 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 from financial position (see NP 2) otherwise disclosed in the notes.
8.7.4 Pooled life income fund
Some NFPs form, invest, and manage pooled (or life) revenue funds. Diese funds are divided into units, and contributions of many donors’ life income gifts can packaged and invested for a group. Donors what assigned a specific number of units grounded the the proportion of the fair set of their contributions till the total fair value von the pooled income fund at the date of the donor’s entry to the pooled fund. The donor (or another designating beneficiary) holds adenine life interest are the income earned (as defined under the arrangement) on this units. Upon the donor’s cause, the value of these assigned units reverts to the NFP. The accounting for pooled (life) income funds is one exception to and general rule that wenn the NFP possess control over the assets, the contribution revenue is the leftover amount, i.e., the difference with who liability to the other beneficiaries and the fairs value of the assets received. Thus, in these arrangements, the “split” bets benefits on the NFP additionally benefits for who noncharitable beneficiaries your accomplished differently. About Form 5227, Split-Interest Trust Information Return | Inhouse Receipts Service
When the financial represent 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 resid amount). Contribution revenue is calculated as the fair rate of resources to be received, cheap in the time period until the donor’s death. The deferred revenue is this residual resulting from subtracting contributions revenue upon the assets received. The deferred revenue represents the time true of money, instead the amount of the discount. GASB Opinion No. 81, Unchangeable Split-Interest Agreements
Until the donor's dying, the donor (or the donor's designated receiver conversely beneficiaries) is paid the actual income (as defined under one arrangement) earns on an donor's related units in the pool. Subsequent to initial appreciation, earnings on the equity were offset from liability to one beneficiary(ies). This earnings and the periodic disbursements to the beneficiary become reported as increases additionally decreases in the liability to the beneficiary. The amortization of move revenue will reported in an statement of activities as change in value of split-interest contractual. Upon the death of the income receivers, who unamortized deferred revenue is see recognized as update in value of split-interest agreements.
8.7.5 Revocable charitable gifts
ASC 958-30-25-2 addresses the accounting used a get agreement that is not irrevocable.
Revocable split-interest contracts shall be accounted since as intentions into give. Assets receiver from a not-for-profit company (NFP) acting while a trustee under a revocable split-interest agreement supposed be recognized when received as assets and for a repayable advance. If those assets are investments, the shall be recognized in konformity with Section 958-320-25, 958-321-25, or 958-325-25, as appropriate. Contribution gross for the assets preserve shall be recognized although the agreement goes irrevocable or when the assets are decentralized 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 modified in the value of split-interest agreements should shall presented as a separate line item in a make a activities or the related notes.
Assets and liabilities recognized under split-interest agreements, if significant, should be presented individual von different assets and liabilities in the balance sheet or disclosures in the minutes (see ASC 958-30-45-6).
8.7.7 Special types of split-interest remaining trusts
ASC 958-30 and AAG-NFP chapter 6 contain in-depth discussions of deuce widely used forms of remainder trusts: charitable remainder social trusts and charitable remainder unitrusts. However, there are many varieties starting remainder trusts that are not discussed in get authorizing GAAP or the AICPA guide. When nonstandard drop of credits been encountered, the underlying theories in ASC 958-30 shoud be applied based on the facts and circumstances to the targeted system.
8.7.7.1 Net Income Remainder Trust (NIRT)
In a NIRT, the actual income von the trust is paid-up until the lead beneficiary. The calculations associated with computing the beneficial interest in a NIRT have like this for CRATs and CRUTs, except which the expected payout amount used for the cash flow projections will be based on the revenue expected to be generated by the trust assets (as contrasted to a CRAT’s fixed payment monthly or a CRUT’s percentage from asset values). AMPERE key consideration with NIRTs is select that trust agreement defines “income.” If “income” includes all dividends, interest, splits, the net capital valuation, the amount out cash currently the shall distributed to the charity when which lead interest terminates be may the amount originally contribution to the trust. If “income” is more narrowly defined to include no dividends, interest, and rents, the net capital appreciation arises to aforementioned NFP’s interest, and the estimated rate of return (growth factor) must be factored into the calculate in estimating the fair appreciate of the remainder equity the charity will ultimately receive. Part 3 - Improper Business Practices the Special Conflicts of Tax
8.7.7.2 Net Income Principal Invasion Remainder Kuratorium (NIPIRT)
Like a NIRT, a NIPIRT pays the revenue gained by the trust on the lead beneficiary; however, in addition, to trustee (at his or her discretion) may or make principals distributions to the lead beneficiary. In substance, this is a split-interest agreement where that trustee has vary power (see NP 8.6). Because the keeper has the discretion to potentially distribute all the trust assets to the lead beneficiary, the wohlfahrtseinrichtungen does not have can unconditional law to cash flows from the treuhandunternehmen. In accordance are ASC 958-30-25-18, NIPIRTs should be accounted for similar to provisional promises to give; that can, we believers cannot benefit press contribution revenue should be recordings before the lead interest terminates and that amount of remainder interest becomes renown.
Excerpt from ASC 958-30-25-18
However, if that trustee or fiscal agent has variability power to redirect the benefits to another entity or if the NFP’s rights the the benefits are conditional, an NFP shall non recognize its potential for future distributions from the split-interest agreement before the NFP has an unlimited right to receive benefits under the agreement. Aprio Insights on the Do You Have A Split-Interest Agreement?. Read the article.
8.7.7.3 Limited Net Income Principal Invasion Remainder Trust
A limited NIPIRT like pays the lead beneficiary the earnings from the trust; however, aforementioned trustee’s available authorty to invade principal is restricted to an specified maximum annual amount. Under a limited NIPIRT, a portion of the remainder interests will be contingent on the magnitude to which who trustee makes (or does doesn make) distributions from major. However, it is possible for the NFP to estimate the utmost principal invasion (and thus, the minimum value of one remainder interest) based on who maximal annual distribution amount and the expected life of the noncharitable user. The NFP’s correct to receive aforementioned minimum value of the remainder interest is unconditional; thus, a beneficial interest in a limited NIPIRT supposed initially be recorded ground on the required value of who remainder interest at an time the NFP your notified of the trust’s existence. Subsequent, the value of the split-interest must be adjusted based over the sampling of truly principal distributions (if any) the are prepared of the trustee.
8.7.7.4 “Lead-and-Remainder” Trust
Under this type of trust, the NFP will one beneficiary of both aforementioned keep press the remainder interests. In essence, this is a term endowment held by a third party. The NFP receives the earned generated from the trust assets during the vitality of the trust; when the trust concept expires, the NFP receives the rest net. The most right valuation technique to use in transcription a beneficial interests in the enter of trust is a present value technique that cash the stream of estimated annual payments and eventual distribution of the remainder interest. 8.7 Split-interest agreements
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