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Banks vs. Nonbanks in US: Disintermediation. Trust Services. A trust institution : a legal entity that can hold and manage assets for one or more beneficiaries over time Grantor is the creator of the trust Trustee is the manager of the trust
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Trust Services • A trust institution: a legal entity that can hold and manage assets for one or more beneficiaries over time • Grantor is the creator of the trust • Trustee is the manager of the trust • Beneficiaries receive the benefits of the trust • Business trusts historically were formed among firms in the same industry to avoid competition and gain monopoly power • The Sherman Antitrust Act of 1890 in US and other legislation struck down such anti-competitive behavior • Today holding companies (ownership of affiliated firms) and consortiums (association or partnership of financial institutions but no cross ownership) have replaced trusts as a common form of business organisation • Trust institutions now handle employee benefit programmes, personal trusts and estates, and corporate trusts • Real estate investment trusts (REITs) is a trust that purchases real estate and offers shares of ownership to investors • Trust companies can be within or outside a bank for purposes of estate planning to distribute assets of an individual after death and reduce taxes for beneficiaries: US federal estate tax rates range from 37% to 55%!
Trust Fund Training Presented By Trust Fund Operations Committee October 25, 2005 9 am -12 pm
Trust Fund OverviewWhat is a trust fund? • Donation or bequest received by the University that has conditions and/or legal requirements for use • Conditions/requirements are agreed upon by the donor and the University, or terms for use are established by the University • Various types of trusts
Long Term General perpetual trusts - only income from capital can be expended General long term -both capital and income can be expended Short Term Specific trusts - to be spent in the current year for some specific purpose designated by the donor Types of Trust Funds
How McMaster ‘Manages’ Trusts • People / positions • Policies / procedures • Committees and Councils • Systems • Attestations and donor reporting
People / Positions • Trust Fund Accounting Assistant • Trust Fund Administrators • Financial Services Staff • Development Officers • Treasury Staff and External Managers • Financial Aid and Scholarships Staff • Graduate Studies Staff • Staff in Various Faculties
Policies / Procedures • Charitable Giving Policy • Prospect Clearance Policy • Operational Procedures • Investments Policy • Expenditure Policy • Cash Control Policy
Committees and Councils Trust Fund Management • Chaired by AVP’s Admin & Advancement • Sets policies & procedures for managing trust funds • Accountable for annual Trust Funds Review and Attestations • Responsible for TFAIS • Submits reports to Board Finance Committee
Committees and Councils(continued) Trust Fund Operations • Reports to TFMC • Operationalizes policies and procedures • Approves new trust funds • Coordinates flows between departments • Deals with problem trusts (e.g. inactive, too small, overspent) • Ensures centralized files kept
Committees and Councils(continued) Undergraduate and Graduate Councils • Sets policies and procedures for managing scholarships and bursaries • Approves terms for new trust funds dealing mainly with scholarships and bursaries
Systems • Financial Accounting System (FAS) • Financial Aid & Scholarship System • Advancement System • Trust Fund Accounting Information System (TFAIS) • Summary of information from Advancement, Scholarship and FAS systems
Attestations & Donor Reporting • Key component of the Annual Review of Trust Funds • Attestations are obtained from administrators confirming terms of trusts have been upheld • Annual statements are sent to donors to provide information on their trust account(s)
Overview • End of Overview • Any questions before we go on? • Next – the role of Advancement
University Advancement • Development • Public Relations • Alumni Advancement • Advancement Services • Decentralized Advancement
Development • Solicit donations from private sources • Handle incoming calls related to donations • Provide donors with naming opportunities • Draft gift agreements that document expectations of the University and the Donor • Holds gift announcement functions • Stewards donors ensuring a long term relationship, one tool is the annual Endowment Fund and Chair Statement
Development’s Role in Trusts • For scholarships / bursaries, or issues related to the establishment of new trusts, Senior Development Officer is the key liaison with donor, TFOC, Adv. Serv., Financial Services, SGS and Office of Student Financial Aid & Scholarships • Discuss with Donors terms / conditions / policies regarding trusts • With Donor, and in cooperation with fund administrator, develop terms of reference for new trust
Development’s Role in Trusts • Move establishment of new trust through TFOC process • Request the opening of a new trust fund including name of fund, terms of reference, type of fund, funds available and donor contact • Note: As a result of audit, gift agreements are currently being updated to better reference University policies related to trusts
Acts as processing unit for all areas in University Advancement Advancement Services
Donations • Verifies that every gift is for a university approved project • Ensures every gift qualifies as a charitable donation according to CRA • Records all donations on Advance system • Generates all tax receipts for income tax purposes
Donations • Appropriately acknowledges all donations • Produces financial accounting information • Correspond with Investments regarding estate and securities donations • Produce pledge reminders to donors, for review and mailing by Development Officers
Gift Restrictions • Cashing a cheque can be construed as accepting a donor’s conditions • If we accept a cheque, the funds must be used as the donor expects • CRA will audit to ensure that donor’s funds are spent as the donor indicated
Accounting Practices • Produce month-end report to trigger monthly transfers to trust funds • Donations are transferred to FAS via journal entry
Allocations • Every allocation represents an approved project or university type expenditure • The name on the allocation appears automatically on the tax receipt • Each allocation has an FAS account number attached to it • If the funds from more than one allocation are deposited to a general FAS account, then the administrator is responsible for monitoring the expenditures
Types of Allocations Requiring Trust Accounts • Endowed Chairs ($2 million required) • Endowed Research Projects (under $2 mil) • Endowed Scholarships / Bursaries (min $20K) • Non-Endowed Scholarships/Bursaries (minimum 5 year commitment @ $1K/yr) • Other funds to be held long-term, with interest
Advancement Services –Donations Role • Deposit funds into a Campaign/Annual Fund revenue account • Set up an allocation flagging administrator and trust account number • Produce monthly Donations Notification • Provide Trusts Assistant w/ Designated Report • Ensure all revenues transferred according to University transfer policy
University Advancement Web Sites • http://www.mcmaster.ca/ua/alumni/giving/ • http://www.mcmaster.ca/policy/ • http://www.mcmaster.ca/policy/develop.htm • http://www.mcmaster.ca/ua/policy/ Prospect%20Clearance%20Policy.htm • http://www.mcmaster.ca/ua/policy/ CHARITABLEGIVINGPOLICY.htm
University Advancement • End of University Advancement • Any questions before we go on? • Next – the role of Trust Fund Administrators
Trust Fund Administrator’s Role Context • Trust funds = approximately 1,400 • Trust fund administrators = 38 • Total value of trust funds = approximately $250 million
Trust Fund Administrator’s Role Purpose of trust funds • Student awards • Chairs • Professorships • Library and Art Gallery acquisitions • Other
Trust Fund Administrator’s Role Key role of trust fund administrators • Participate in the appropriate initial set-up of the fund • Administer and care for the fund • Report on use of the fund • Budget fund resources • Steward the fund and its donors
Trust Fund Administrator’s Role Policies and Procedures Guiding Trust Fund Management • http://www.mcmaster.ca/bms/policy/finance/opguide.htm (under review) • http://www.mcmaster.ca/bms/finance/ (how to set up a trust fund)
Trust Fund Administrator’s Role Initial set-up • Terms that can be administered in perpetuity • Collaboration between all stakeholders • Approval process • Signed Gift Agreement or Pledge of Support • Open trust fund – how to • Promote gift in appropriate publications
Trust Fund Administrator’s Role Ongoing administration • Determine annual allocation (4%) • Ensure match between terms and allocations • Monitor activity, inactivity, deficits, problems Reporting • Update TFAIS re recipients • Review TFAIS data prior to printing of Endowment Fund • Maintain donor files
Trust Fund Administrator’s Role Budgeting • Account for annual interest • Account for expenditures Stewardship role • Donors and student thank-you’s • Special attention files • Revisions to terms
Trust Fund Administrators • End of Trust Fund Administrators • Any questions before we go on? • Next – Accounting
Cash Control Policy • http://www.mcmaster.ca/bms/policy/finance/ • cashcont.htm • Proper segregation of duties • Cheques must be stamped “for deposit only” • Independent person reviews the deposit • Deposits agreed to FAS statements
Cash Control Policy • Funds collected to be held in locked, fireproof cabinets • A cheque log should be prepared • Written procedures should be developed • Deposits should not be put through the University’s Mail Services • Internal Audit is available for consultation on this policy
Accounting • Standard Subcodes for Trust Accounts • Specific Trusts: • 0484 Donation Revenue • 0997 Over/Under Exp Cfwd • 2200 Trust Fund Awards • General Trusts (0 side): • 1100 Claim on Cash • 2500 GT Unexp Cap May 1 • 2501 GT Unexp Cap Cur/Yr
Accounting • General Trusts (continued): • 2502 OSOTF I Donation • 2503 OSOTF Donation Cur/Yr • 2504 OSOTF I Gov Cont • 2505 OSOTF Gov Cont Cur/Yr • 2506 OSOTF II Donat May 1 • 2507 OSOTF II Gov’t May 1 • 2508 Cap Pres Prior • 2509 Capital Preservation • 3700 Trust Funds Other
Accounting • General Trusts – Subsidiary Ledger (7 side): • 0484 Donations Rev • 0625 Invest Inc Allocated • 0997 Over/Under Exp Cfwd • 2200 Trust Fund Awards • 2201 Trust Fund Transfers • 2205 Trf to Other Ledgers
Transfers Between Trusts and Other Ledgers • Should not be done, except under exceptional circumstances. • eg. required by Gift Agreement, Endowed Chairs, or PVP approved • All expenditures should be made from the trust to ensure they are following the terms and conditions of the trust (excepted are Chairs & Professorships) • All deposits into trusts must be processed through University Advancement
Chairs and Professorships • Must have a corresponding 2 account • All budget matches, faculty contributions and expenditures must be recorded in the corresponding 2 account • Should spend from 2 account first, transferring expendable income from the 7 account when necessary • April final balances in 2 accounts must be carried forward each year
Trust Fund Accounting Information System • Preview of system • TFAIS Manual available