Properly Managing a Donor’s Gift Restrictions

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Donors to nonprofits will sometimes attach conditions to their gifts. Restrictions can limit how an organization uses funds. When an organization is offered a gift that comes with strings attached, it needs to consider two issues: whether the restriction is acceptable, and how it should be managed. Having a clear policy regarding restricted gifts is one way an organization can protect itself.

Gift restrictions can be unlawful, or just unsavory

Some common gift restrictions should give organizations little trouble. Sometimes a donor will simply want to ensure that the gift will be used to further the organization’s primary mission. A donor will sometimes ask that a gift be held for a certain time, or subject to a contingent event like another donor providing matching funds. Such restrictions should be expected.

Other restrictions can reflect poorly on the organization or create legal problems. Here are some examples:

  • Self-dealing. Restrictions that would provide substantial benefit to the donor or the donor’s family members are unethical and could entangle the organization in the donor’s unlawful activities, such as tax evasion or even money laundering. Some forms of incidental benefit aren’t a problem, but whenever self-dealing may be an issue it’s worth examining the question closely.
  • Violation of public policy. Gifts that are conditioned upon factors that are plainly biased and unenforceable should be refused. For example, a donor who asks that the gift only be used in a racially discriminatory manner is asking the organization to adopt bias as a policy. Doing so not only would make the organization look bad, but it could also land it in court.
  • Breach of purpose. Accepting a large gift that contradicts the organization’s stated purpose could undermine the basis of its income tax exemption. It may also cause other donors to take their money elsewhere.

Have a process for complying with reasonable gift restrictions

Failing to fully comply with a donor’s gift conditions can have serious consequences for a nonprofit, including undermined donor confidence and requests for gifts to be returned. Organizations need to treat restrictions as the contractual obligations they are. In some cases special arrangements will need to be made to comply. For example, a gift of money may need to be deposited in a special account.

Every nonprofit can benefit from adopting clear policies for dealing with gift restrictions. At a minimum, the choice of whether to accept a restriction should be made by top-level management, and only after adequate due diligence. Each organization will need to tailor its policies to its own circumstances, taking into account its governance requirements, potential donor pool, and other factors.

Consult with an attorney about gift restrictions

The Church Law Center of California provides expert legal advice to religious and secular nonprofits. We are available to answer your questions about gift restrictions and other governance matters. Call us today at (949) 689-0437 or reach out to us through our contact page.

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