Insights

Restricted donations can be a blessing and a curse. Many nonprofits rely on restricted donations, but not all restrictions are easy to follow. This article explores what restricted donations are, common ways donors might restrict their contributions and how an experienced attorney can help nonprofits navigate the applicable rules and laws.

What is a Restricted Donation?

A restricted donation is a financial contribution given to a nonprofit organization with specific conditions on how the funds can be used. These restrictions are set by the donor and must be honored by the organization receiving the donation. The purpose of these restrictions can vary widely, from funding particular projects to supporting specific programs or initiatives. When it comes to restricted donations, gift instruments are crucial. A gift instrument outlines the terms of the donation and its restrictions. This could be via email, letter, or even a text message from a donor.

Types of Restricted Donations

1. Temporarily Restricted Donations: These are funds that are restricted for a particular purpose for a certain period of time. Once the conditions are met or the time period expires, the funds can be used for general purposes.

2. Permanently Restricted Donations: Also known as endowments, these funds are invested to generate income, and only the income earned from these investments can be used according to the donor’s specified purpose. The principal amount remains intact indefinitely.

Common Examples of Restricted Donations

Donors may restrict their contributions in various ways to ensure their funds are used for specific purposes. Here are some of the most common examples:

1. Scholarships and Fellowships

Donors often restrict funds to provide scholarships or fellowships for students at universities or other educational institutions. These restrictions can specify:

• The field of study, program or major

• The criteria for selecting recipients

• The duration of the scholarship (1 semester, 4 years, etc.)

2. Research and Development

Donors may earmark funds for specific research projects or the development of new programs. Restrictions can include:

• The type of research to be conducted

• The research team or department to being funded

• Specific outcomes or milestones

3. Capital Projects

Restricted donations for capital projects are common. Restricted donations made during capital campaigns are often set aside for things like:

• Building new facilities

• Renovating or adding on to existing buildings

• Purchasing equipment

4. Program Support

Donors might restrict their contributions to support particular programs or initiatives within the nonprofit. There are plenty of different types of restrictions in this arena, but some of the most common are:

• The program(s) they want their gift to fund

• The geographical area the funds should be used to serve

• The target population

5. Endowments

Endowment funds are a form of permanently restricted donations where the principal is invested, and only the income generated is used. Common restrictions for endowments include:

• Specific purposes for the income (e.g., scholarships, research)

• Investment guidelines

• Reporting requirements

How Attorneys Can Help Nonprofits Navigate Rules Around Restricted Donations

Navigating the legal complexities of restricted donations can be challenging for nonprofits. This is especially true in situations where a donor’s exact instructions can’t be followed for whatever reason. Having an attorney experienced in UPMIFA and other relevant nonprofit law is helpful for nonprofit leaders to navigate challenges appropriately. If you are looking for assistance with handling restricted donations properly, please contact us to speak with an experienced attorney.

1. Drafting and Reviewing Gift Agreements

Attorneys help nonprofits draft and review gift agreements to ensure they clearly outline the donor's restrictions and intentions. This can be especially helpful when a nonprofit is handling multiple restricted gifts with varying restrictions. This process involves:

• Specifying the exact use of the funds

• Defining any conditions for use

• Outlining procedures for reporting and accountability

2. Ensuring Compliance with State and Federal Laws

Nonprofits must comply with various state and federal regulations concerning restricted donations. Attorneys ensure that these organizations adhere to the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which governs the management and investment of endowment funds in many states.

3. Managing and Investing Funds

Proper management and investment of restricted funds are crucial. Attorneys advise nonprofits on best practices for managing and investing these funds in compliance with donor restrictions and legal requirements. This includes:

• Developing investment policies

• Ensuring prudent management

• Reporting on fund performance

4. Resolving Disputes

Disputes can arise between donors and nonprofits regarding the use of restricted funds. Attorneys mediate and resolve these conflicts to maintain donor trust and ensure funds are used appropriately.

5. Modifying Restrictions

In some cases, the original restrictions set by donors may become impractical or impossible to fulfill. Attorneys assist nonprofits in seeking court approval to modify these restrictions under the doctrine of cy-près, which allows changes to the terms of a charitable trust when the original purpose is no longer feasible.

Conclusion

Restricted donations come in all shapes and sizes. While some gifts have one restriction, others have several. Honoring donor intent is critical when handling restricted donations. Having an experienced attorney guide your nonprofit through UPMIFA concerns surrounding restricted donations can give you peace of mind. Contact us for a legal consultation.