NONPROFIT QUICKTIPSSM
An electronic publication of Pfau Englund Nonprofit Law, P.C.
Disclaimer: This publication is designed to provide accurate information in regard to the subject matter covered. However, it is not intended to provide legal or other professional advice. If legal advice is required, the services of a competent professional should be sought.
Are Restricted Funds Really Restricted?
Sometimes donors restrict the use of funds given to an organization or its charitable foundation. Years later, when needs and priorities have changed, an organization may want to broaden or change from the original use of the funds but find themselves bound by the restriction. Or are they? This Quicktip focuses on when donor restrictions may be lifted…or were never valid in the first place.
When are funds really restricted?
To be restricted, the terms of the “gift instrument” - the written document conveying the funds or assets to the organization such as a will, deed, grant, agreement, memorandum or other writing - must explicitly state that the donated funds are not wholly expendable on a current basis by the organization to which they are donated. A verbal "wish" or desire is not sufficient to create a restriction.
Once restricted, always restricted?
Yes and no. Once a donation is made, donors generally lose all property interests in their gift. This means that donors usually have no right to sue an organization for alleged misuse of their gift. However, the original gift instrument is still valid. So, what should you do?
Review the written documents that accompanied the donation to determine if a legal restriction was made on the use of the funds.
If there is an explicit restriction, consider asking the donor for consent to remove or change the restriction.
If the donor is unable, due to death or disability, to provide consent, consider applying to the appropriate court for release of the restriction.
Releasing restricted funds is a matter complicated by various laws, including the Uniform Management of Funds Act, and tricky donor relationships. Therefore, seeking the advice and assistance of a competent professional may be wise.
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Nonprofit QuickTipsSM is a periodic electronic publication of Pfau Englund Nonprofit Law, P.C. It is intended to provide nonprofit executives with useful, quick legal tips. If you have a topic you would like covered in this publication, or know someone who would like to be added to our e-mail list, please contact the firm.