We’ve had several faith-based clients and churches inquire over the last quarter about dormant “restricted” funds that are sitting on their balance sheet. These gifts were originally designated for certain purposes by the donors and are therefore “restricted,” and unusable for general, day to day operating purposes. The idea that the restriction or designation is binding is generally accurate and should not be forgotten by CFOs and Executive Pastors and Directors. Gifts given for a specific reason, and designated as such by the donor, generally may be used only for that purpose. Ignoring the designation can lead to possible civil liability for the organization, practical fallout within the membership, and undesired publicity.
There are, however, ways to release or modify restrictions. The threshold step is to ensure the use restriction is donor-designated and not merely board/elder- designated. Sometimes governing boards self-impose fund restrictions. Self-imposed restrictions can usually be lifted by the governing boards that imposed the restrictions in the first place.
Restrictions imposed by donors, on the other hand, can only be modified or released in accordance with state law. Nearly every state has adopted some form of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), which governs how nonprofits manage and invest charitable funds, and outlines the process for releasing or modifying donor-imposed restrictions.
North Carolina’s UPMIFA (NC Gen Stat Chap 36E, here: General Statute Sections - North Carolina General Assembly (ncleg.gov)), like other state UPMIFA laws, gives three general paths to modify or release donor restrictions, briefly summarized below. Written donor consent is generally required for a full restriction release. Court approval/AG Notice can work for modifications. Scope and specific facts are important.
- Donor Consent. Written consent from the donor(s). Careful wording is important to adhere closely to the UPMIFA.
- Court Approval. Upon court approval after notice to the state Attorney General in certain circumstances (such as illegality, impracticality or impossibility, waste, fund impairment, donor unanticipated circumstances). However, any modification generally must stick closely to donor intent and the charitable purpose for which the gift was given.
- State AG Notice, w/ Conditions. After 60+ days’ notice to the state Attorney General in certain circumstances (similar to above) and only if certain conditions are met (fund value less than 100K, 10+ years since fund established). As with the court approval approach, the proposed use must be consistent with charitable purposes expressed in the gift instrument.
Other than written agreement of the donor, modification generally requires a showing that the restriction has become unlawful, impracticable, impossible to achieve, or wasteful, and any repurpose of the fund generally must be as consistent as possible with the charitable purposes expressed in the gift instrument.
Please don’t hesitate to reach out if we can assist with any specific questions related to these concepts, or if there are restricted gifts you want to assess for additional flexibility.