How Do We Get Rid of an Outdated Restricted Fund?
Restricted funds, where a donor specifies how their donation will be used, can be a great boon to charities. Many donors, especially those wishing to establish a legacy do want to restrict their gifts to a particular purpose that is close to their hearts. These restricted gits often occur during a donor's lifetime or as part of a bequest to take place after the donor's death.
Although no charity would turn down a donor who wants to restrict their gifts, in general, they prefer nonrestricted donations merely because they can then direct those funds where they are most needed. Where restricted gifts work well are purposes such as funding the operation of a building in perpetuity or funding a scholarship program for certain types of students. Restricted gifts often become part of an organization's endowment which can help support the organization and ensure a healthy future.
On the other hand, restricted gifts can be a problem many years afterward if the original purpose is no longer relevant or never came to fruition. In these cases, a restricted fund might be obsolete and create financial problems for the charity. Could the money be better used in some other way?
For instance, one charity wrote: "We had a bond campaign years back for a new public library building. Donations were made to a related nonprofit specifically for a new building, totaling around $75,000. The bond issue failed, and the new building will most likely not happen in our lifetime. What can be done with that money? Is there a time limit on how long we have to hold it before it can be used for another purpose?"
State law governs gift restrictions. In many states, the primary law that governs the expenditure of charitable assets is the state's version of the Uniform Prudent Management of Institutional Funds Act ("UPMIFA"). UMPIFA governs certain activities related to the management of charitable funds including the release or modification of gift restrictions.
UPMIFA is a default rule that is only effective when the donor has failed to express a clear intention a gift instrument. However, under the Act, virtually any record can serve as a "gift instrument" that legally restricts the gift. For example according to the comments to UPMIFA, an e-mail, a jotted down note clipped to the check, a statement in the memo portion of the check or even the language of the solicitation itself can serve as part of a gift instrument that will override UPMIFA's terms.
Where the funds cannot be used for the purpose for which they were solicited, UPMIFA specifies the process for modifying or terminating the restriction. Essentially, where restrictions become outdated, wasteful or unworkable, UPMIFA permits charitable institutions to seek a release from the original donor. Alternatively, the charitable institution can petition the court for an order modifying or terminating the restriction. In such cases, UPMIFA requires notice to be provided to the state Attorney General.
Finally, UPMIFA includes an option for charitable institutions to modify small, old funds in a manner consistent with the original purpose of the gift without going to court. The streamlined procedure generally requires notification to the state Attorney General. If the Attorney General does not object within the sixty day period, then the charitable institution can unilaterally release the restriction. Generally, this option is only available for funds valued at less than $25,000 that are more than 20 years old although some states have adopted different thresholds.
Although the need to change a restricted gift to unrestricted is extremely rare, it does occur. After all, if your charity has been receiving restricted gifts for decades (especially with planned giving programs), it is likely that eventually one of those purposes has expired or changed significantly. When that happens, it's good to know that your organization may have some viable options.
Ellis Carter suggests checking out these resources for more information:
Disclaimer: The information on this site is for guidance, ideas, and assistance only. When in doubt, always seek legal counsel or assistance from State, Federal, or International governmental resources.