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Banks vs. Nonbanks in US: Disintermediation

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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

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• 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

Trust Fund OverviewWhat is a trust fund?

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Types of Trust Funds

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

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• People / positions • Policies / procedures• Committees and Councils• Systems • Attestations and donor reporting

How McMaster ‘Manages’ Trusts

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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

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Policies / Procedures

• Charitable Giving Policy• Prospect Clearance Policy• Operational Procedures• Investments Policy• Expenditure Policy• Cash Control Policy

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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

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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

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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

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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

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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)

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Overview

• End of Overview• Any questions before we go on?

• Next – the role of Advancement

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University Advancement

• Development

• Public Relations

• Alumni Advancement

• Advancement Services

• Decentralized Advancement

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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

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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

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• 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

Development’s Role in Trusts

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Advancement Services

R esearch B iog rap h ica l D on ation s S ys tem s

• Acts as processing unit for all areas in University Advancement

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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

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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

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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

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Accounting Practices

• Produce month-end report to trigger monthly transfers to trust funds

• Donations are transferred to FAS via journal entry

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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

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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

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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

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29

30

31

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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

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University Advancement

• End of University Advancement• Any questions before we go on?

• Next – the role of Trust Fund Administrators

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Trust Fund Administrator’s Role

Context• Trust funds = approximately 1,400 • Trust fund administrators = 38 • Total value of trust funds =

approximately $250 million  

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Trust Fund Administrator’s Role

 Purpose of trust funds• Student awards• Chairs• Professorships• Library and Art Gallery acquisitions• Other

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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

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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)

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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

 

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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

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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

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Trust Fund Administrators

• End of Trust Fund Administrators• Any questions before we go on?

• Next – Accounting

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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

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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

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AccountingStandard 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

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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

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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

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General Trust Funds

0 ledger 7 ledger

Cash Balance (total of fund) 1100

Non Expendable Expendable

Donations opening 2500 $ 0625 Investment Incomecurrent 2501 $ 0484 Donations Received

$ 0997 Balance C/F (previous years)OSOTF I opening 2502 $$Match opening 2504

$ 2200 PaymentsOSOTF II opening 2506 $ 2201 Transfers (among trust accounts)

current 2503 $$

Match opening 2507 $$$

current 2505

Capital Preservation opening 2508current 2509

Sub ledger Total 3700

Memo Accounts income 9370expense 9570

At Year End

The difference between the allocation and the actual income earned will go to the Capital Preservation subcode 2509

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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

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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

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Trust Fund Accounting Information System

• Preview of system• TFAIS Manual available

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Break

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Investment Pool

• The financial objective of the fund is to earn a real return of 5.25% over the long term

• Real rate of return is net of inflation Example: 8.25% Total Return - 3.0% CPI = 5.25%

Real Return

• 5.25% real return per annum is required for spending 5.25% = 4.0% (spending) + 1.0% (administration) + 0.25%

(fees)

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Investment Pool

• Preserve real value of capital• Focus on total return

• i.e. interest + dividends + realized gains/losses + unrealized gains/losses

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UBS20%

Canadian Stock20%

BGI(Passive)

20%

U.S. Stock20%

Fidelity 10%

EAFE20%

UBS 20%

BGI(Passive)

20%

Canadian Bond40%

Total Fund

P.I.A. 10%

Investment Pool Current Structure

(Policy)

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Market Value Actual Mix Policy Mix

($ Million) (%) (%)

Canadian Equity $ 93.9 21.5 20

U.S. Equity 85.7 19.6

EAFE Equity 84.0 19.2

TOTAL EQUITY $ 263.6 60.3 60

Bonds 158.7 36.4 38

TOTAL FUND $ 436.6 100% 100%

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Cash 14.3 3.3 2

Investment Pool – Asset Summary at June 30 , 2005

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Q2/05 1 Year 2 Years 3 Years 4 Years

% % % % %

Total Portfolio Return 2.7 9.8 11.8 8.3 5.6

Less: inflation Rate 0.6 1.7 2.1 2.3 2.0

Real Return After Inflation 2.1 8.1 9.7 6.0 3.6

5 Years

%

2.8

2.3

0.5

Historical Performance - Combined Fund Analysis

(June 30, 2005)

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• Bonds• Bond yield model assumes current

yield reverts to a long-term equilibrium value over time

• Equities• Equity risk premium is key

assumption• Belief that equities will outperform

bonds over the long term• Premium is 3% p.a.

• Assume equal returns for all equity markets

• Reasonable statistical basis based on Russell research

* For a 10-year time horizon

ExpectedReturn*

Universe Bonds

Long Bonds

5.1%

5.8%

Global Equity

Canadian Equity

8.1%

8.1%

6.1%Real Estate

Real Return Bonds 6.0%

Development of Capital Market Assumptions

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McMaster UniversityInvestment Pool Rate of Return

for 2004/05$ %

Total Realized and Unrealized Income 31,130,549 7.61

Total Investment Expenses 984,414 0.24

Net Investment Income 30,146,135 7.37

Average Investment Pool Balance Using Monthly Market Values 408,855,855

Net Rates of Return for the Five Years Ended April 30, 2005

Based on Average Market Values

2004/05 7.372003/04 15.022002/03 -5.792001/02 -1.572000/01 -3.57

Five Year Annualized Return 2.53

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Treasury

• End of Treasury• Any questions before we go on?

• Next – Finance

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Trust Fund Website• http://www.mcmaster.ca/bms/finance/

• Definition of Trust Funds• Trust Fund Policies• Trust Fund Management Committee• Trust Fund Operations Committee• How To Open A Trust Fund• Trust Fund Guidelines & Procedures• Related Offices & University Calendars• TFAIS

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Donor Reporting

• An important stewardship commitment to donors who establish endowed trusts

• Sent out annually in the fall• Endowed Trust Fund Statements (approx

600/yr) produced from TFAIS

• Endowed Chair Statements (approx 60/yr) prepared manually

• Reporting began in 2000

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Endowed Trust Fund Statement (regular)

May 1, 2004 to April 30, 2005 McMaster Contact Claudia Russell University Advancement McMaster University, DTC 125 1280 Main Street West Hamilton, ON L8S 4L8 Endowed Trust Fund Account Number E-mail: russelc@mcmaster.ca 777769 Phone: (905) 525-9140 ext. 27584

Name of Endowed Trust Fund NAME OF ENDOWED TRUST

FUND TERMS OF REFERENCE ENTERED HERE. Fund Performance

Opening balance as of May 1…................................................................................$185,312.65

Donations received…...….….….….…............................................................................... $0.00

Net investment income…..……..…..…......................................................................$32,951.67

Expenditure….…..….….…..…...…..….….…. ...................................................... ($23,817.00)

Closing balance as of April 30 .................................................................................$194,447.32

Reading Your Endowed Trust Fund Statement

Opening balance as of May 1: The market value of the endowed trust fund as of May 1, 2004

Donations received: Any donations received during the reporting period

Net investment income: Net investment income includes realized and unrealized income net of investment management expenses (currently 0.24%) and endowed trust fund administration costs (currently 1.0%)

Expenditure: The actual amount of money disbursed for the agreed upon purpose

Closing balance as of April 30: The market value of the endowed trust fund as of April 30, 2005 Please see reverse of this statement for details on expenditures during this reporting period

Thank you for your ongoing support of McMaster

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Endowed Trust Fund Statement (Chair)

At April 30, 2005 Donor’s Name McMaster Contact Donor’s Address Administrator’s Name Administrator’s Address E-mail: Phone:

Trust Fund Name Account numbers (7 & 2) At April 30, 2005 Endowed Trust Fund University Contribution Total Funds This Year To Date This Year To Date This Year To Date Capital Received 0 1,000,000 0 1,000,000 University Capital Match University Contribution 51,725 101,725 51,725 101,725 Additional Faculty Contribution Net Investment Income 129,291 112,008 129,291 112,008 Expenditures (21,900) (21,900) (101,725) (101,725) (123,625) (123,625)

Fund at Market Value 107,391 1,090,108 (50,000) 0 57,391 1,090,108

Reading Your Endowed Trust Fund Statement Capital Received: Funds received during the reporting period and to date University Capital Match: Funds contributed by the University to enhance the capital as agreed upon in the Gift Agreement University Contribution: Funds contributed by the University for expenditures as agreed upon in the Gift Agreement Additional Faculty Contribution: Funds contributed by the Faculty for expenditures Net Investment Income: Net investment income includes realized and unrealized income net of investment management expenses (currently 0.24%) and endowed trust fund administration expense (currently 1.0%) Expenditures: The actual amount of money disbursed for the agreed upon purpose Fund at Market Value: The market value of the endowed trust fund as of April 30, 2005

Thank you for your ongoing support of McMaster

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Annual Review of Trust Funds

• Attestation of Operational Guidelines• www.mcmaster.ca/bms/policy/finance/opguide.htm

• Signing Authority Report including Designation • Deficit Report

• Inactive Report

• A package will be sent to all trust fund administrators on November 3, 2005 with a deadline date of November 18, 2005.