Restricted funds or donations, where a donor specifies how their donation will be used, can be a great boon to charities, but also can be problematic.
Restricted gifts can only be used for the donor's designated purpose, while unrestricted donations can be employed by the charity wherever it chooses.
For instance, a donor wishes to endow a building on the campus of his alma mater in perpetuity. A restricted gift works well to accomplish this purpose. On the other hand, charities spend most of their fundraising time on procuring unrestricted gifts that they can use as needed. Unrestricted funds allow the maximum flexibility for charities.
Why Some Donors Prefer Restricted Funds and Charities Do Not
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 gifts often occur during a donor's lifetime or as part of a bequest to take place after the donor's death.
These gifts have specific characteristics.
For instance, only the donor can designate how the money will be used. These restricted gifts are sometimes solicited by the charity, such as fundraising for a new building. But many are not sought and result from the donor's wish to restrict the gift to a particular purpose. An example might be a donor setting up a scholarship in honor of a deceased person.
In the case of an unsolicited restricted gift, the charity does have the option to reject it if the organization finds that acceptance would cause undue burden for the charity or if the purpose of the donation does not align with the charity's mission.
Also, restricted gifts are almost always permanent, although the restriction can be designated for a particular time frame rather than in perpetuity. In rare cases, a charity might ask the original donor to repurpose the restricted gift if the charity desperately needs that money for something else.
Unrestricted donations, on the other hand, can be used by the charity for any purpose. Most donations are unrestricted. An example is when we donate to a charitable fundraising campaign as a result of a direct mail solicitation or an email appeal.
Even if the campaign seems to be asking for a donation for a specific reason, such as a natural disaster, the gift is not restricted to that purpose unless the charity states explicitly so in its solicitation. Charities often clarify their donation restriction policies on their websites.
Most charities welcome donors who want to restrict their gifts, and a willingness to accept restricted gifts can incentivize some donors to give and to make those donations larger.
However, in general, charities prefer unrestricted donations because they can then direct those funds where they are most needed. Charities seek a balance of restricted and unrestricted gifts with the majority in the unrestricted category. Such an allocation ensures the ability to attract major donors and still provides the maximum flexibility and liquidity for their finances.
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.
When and How to Release or Repurpose Restricted Funds
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, what if the original purpose for a restricted fund becomes outdated or out of sync with the nonprofit's mission?
The first course of action in releasing or repurposing restricted funds should be the notification of and negotiation with the original donor or donors. But sometimes that is impossible, especially if the fund is very old or the original donor is deceased. If donor consent is not possible, there is a remedy in the laws that govern charitable donations.
Ellis Carter, attorney and the author of the Charity Lawyer Blog, explains that states govern gift restriction. Each state uses a primary law governing expenditures of charitable assets known as the Uniform Prudent Management of Institutional funds Act (UPMIFA). This law governs the release of restricted funds or their modification.
Carter notes that the UPMIFA comes into play only when a donor has not expressed a clear intention regarding the restricted gift. However, the bar for expressing that intention is relatively low. Carter says, "For example according to the comments to UPMIFA, an email, 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."
The UPMIFA also states a process for changing or terminating a restriction when that restriction becomes outdated, wasteful, or unworkable. Then the charity can seek a release from the original donor or petition a court to do so.
In the case of funds 25 years old or more and with a value less than $25,000, the UPMIFA specifies that the charity, instead of going to court, may notify the State Attorney General. After 60 days, if the AG does not object, the restriction can be released.
The Bottom Line
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.
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.