Helpful Tips When Receiving Restricted Gifts
In uncertain times such as these, charities are grateful for all of the charitable gifts they receive. However, charities must be cognizant of the effects of receiving restricted or unrestricted gifts. This post will define restricted and unrestricted gifts, discuss what charities can do to avoid the problems associated with restricted gifts and provide some helpful tips on what charities must do when they receive restricted gifts.
Definition
First, let us start by defining restricted and unrestricted gifts. Restricted gifts are those assets or monetary gifts given to a charity for a particular purpose. These restrictions may be set by the donor through a document detailing intent, such as a bequest, or through a gift agreement between the charity and donor. If a gift is restricted, the charity cannot use the funds for any purpose other than what was designated. On the other hand, unrestricted gifts have no limitations or restrictions set by the donor. The charity can use the funds for any legal purpose appropriate for their organization.
The important point with restricted gifts is that the limitations and restrictions are set by the donor. These restrictions can be either explicit or implicit. The donor can explicitly impose restrictions in a gift agreement by stating that the funds given to the charity can only be used for a particular purpose. Alternatively, a donor’s gift may be given with implicit restrictions. For example, if the charity holds an event to raise funds for a new project and the donor agrees to make a gift at that event, the gift may be given with an implicit restriction that the funds are only to be used for that new project.
What Charities Can Do to Avoid Problems Associated with Restricted Funds
The IRS generally does not regulate the classification of restricted or unrestricted gifts. Thus, the donor and charity have flexibility in determining the use of the funds. A restricted gift can be either a permanent or temporary restriction on how the charity can use the funds. A gift agreement or written designation is a very useful document for detailing gift instructions.
Before accepting a restricted gift, the charity should attempt to carve out caveats allowing the funds to be used for additional purposes in instances where the original purpose is no longer available. If restricted funds are given and the specified purpose becomes moot, the charity cannot use them for another purpose without pursuing additional documentation. The charity and donor can agree that these restricted funds will be directed to a general fund or for another purpose after an expiration of time, completion of a project or some other triggering event. Carving out additional uses for the funds will ensure the charity can fulfill its mission.
The charity can also ask to include a general disclaimer in the gift agreement that restricted funds are subject to re-direction at the discretion of the charity. However, the better route is to treat each gift on an individualized basis. This allows the donor and charity to come to an agreement that benefits both parties.
What Charities Must Do with Restricted Funds
Although the IRS generally does not regulate the classification of restricted or unrestricted gifts, charities should ensure their gift agreements do not run afoul of their exempt purpose or provide a private benefit.
To ensure compliance, restricted funds must only be used for the restricted purpose. A charity may run into problems by unknowingly using these restricted funds for otherwise beneficial purposes. Charities must keep adequate accounting records to ensure that restricted funds are not used for other purposes.
For example, a charity does not have funds designated to pay for improvements on a building, but has funds designated for a scholarship. Those scholarship funds cannot be used to pay for the improvements, regardless of how beneficial and important it is to pay for the improvements.
State law will dictate what a charity must do to remove a restriction when a designated use is impossible or moot. If the restricted gift was made as a bequest, the charity may be required to obtain court approval for a modification of the restriction.
The cy pres doctrine enables a probate court to modify a restriction if the donor’s intent is unable to be achieved. It is most commonly applied to bequests and charitable trusts. Under the cy pres doctrine, the court is permitted to interpret the intent of a donor and apply the intent “as near as possible” to the donor’s wishes.
If the charity can contact the donor, they may approach the donor requesting a modification of the restriction. This will likely require an explanation by the charity about why the adjustment is necessary and how it benefits the charity, while retaining the intent of the donor.
Donors want to help their favorite charities, but will sometimes wish to put restrictions on their gifts. However, many donors may not be aware of the effect restrictions can have on a charity’s ability to fulfill its mission. An honest and upfront conversation with donors and practical contingency plans can ensure these well-meaning gifts can be put to the best use.
September 9, 2020 6:05 PM PT
Well done Nolan. Very helpful. We have many restricted as to a named Bible endowment fund but the earnings may go to the area of greatest need.