1. 9-1 Banks vs. Nonbanks in US: Disintermediation

2. 9-2 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%!

3. Trust Fund Training Presented By Trust Fund Operations Committee October 25, 2005 9 am -12 pm

4. 4 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 Overview What is a trust fund?

5. 5 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

6. 6 People / positions Policies / procedures Committees and Councils Systems Attestations and donor reporting How McMaster ‘Manages’ Trusts

7. 7 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

8. 8 Policies / Procedures Charitable Giving Policy Prospect Clearance Policy Operational Procedures Investments Policy Expenditure Policy Cash Control Policy

9. 9 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

10. 10 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

11. 11 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

12. 12 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

13. 13 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)

14. 14 Overview End of Overview Any questions before we go on? Next – the role of Advancement

15. 15 University Advancement Development Public Relations Alumni Advancement Advancement Services Decentralized Advancement

16. 16 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

17. 17 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

18. 18 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

19. 19

20. 20 Advancement Services Acts as processing unit for all areas in University Advancement

21. 21 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

22. 22 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

23. 23 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

24. 24 Accounting Practices Produce month-end report to trigger monthly transfers to trust funds Donations are transferred to FAS via journal entry

25. 25 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

26. 26 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

27. 27 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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31. 31

32. 32 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

33. 33 University Advancement End of University Advancement Any questions before we go on? Next – the role of Trust Fund Administrators

34. 34 Trust Fund Administrator’s Role Context Trust funds = approximately 1,400 Trust fund administrators = 38 Total value of trust funds = approximately $250 million

35. 35 Trust Fund Administrator’s Role Purpose of trust funds Student awards Chairs Professorships Library and Art Gallery acquisitions Other

36. 36 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

37. 37 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)

38. 38 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

39. 39 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

40. 40 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

41. 41 Trust Fund Administrators End of Trust Fund Administrators Any questions before we go on? Next – Accounting

42. 42 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

43. 43 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

44. 44 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

45. 45 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

46. 46 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

47. 47

48. 48 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

49. 49 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

50. 50 Trust Fund Accounting Information System Preview of system TFAIS Manual available

51. 51 Break

52. 52 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)

53. 53 Investment Pool Preserve real value of capital Focus on total return i.e. interest + dividends + realized gains/losses + unrealized gains/losses

54. 54 UBS 20% Canadian Stock 20% BGI (Passive) 20% U.S. Stock 20% Fidelity 10% EAFE 20% UBS 20% BGI (Passive) 20% Canadian Bond 40% Total Fund P.I.A. 10% Investment Pool Current Structure (Policy)

55. 55 Market ValueActual MixPolicy Mix ($ Million)(%) Canadian Equity$93.921.520 U.S. Equity85.719.6 EAFE Equity 84.019.2 TOTAL EQUITY$263.660.360 Bonds 158.736.4 38 TOTAL FUND$436.6100% 20 Cash 14.33.32 Investment Pool – Asset Summary at June 30, 2005 20

56. 56 Q2/051 Year2 Years3 Years4 Years %%% Total Portfolio Return2.7 9.811.88.35.6 Less: inflation Rate0.61.72.12.32.0 Real Return After Inflation2.18.19.76.03.6 5 Years % 2.8 2.3 0.5 Historical Performance - Combined Fund Analysis (June 30, 2005)

57. 57 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 Expected Return* Universe Bonds Long Bonds 5.1% 5.8% Global Equity Canadian Equity 8.1% 6.1% Real Estate Real Return Bonds6.0% Development of Capital Market Assumptions

58. 58 McMaster University Investment Pool Rate of Return for 2004/05

59. 59 Treasury End of Treasury Any questions before we go on? Next – Finance

60. 60 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

61. 61 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

62. 62 Endowed Trust Fund Statement (regular)

63. 63 Endowed Trust Fund Statement (Chair)

64. 64 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.