It is common for church members to make “designated” or restricted charitable contributions to their church, specifying that their contributions be used for a particular purpose. But what happens if a church board applies such contributions to another purpose? Are there legal consequences for the church or its leadership?
A recent decision by the Mississippi Supreme Court offers critical insights into this issue. The ruling not only discusses the consequences of using donor-restricted funds for other purposes but also highlights the potential for donors to reclaim their contributions under certain conditions.
Understanding Donor-Designated Funds
- What are donor-designated funds? These are contributions explicitly earmarked by the donor for a specific purpose, such as a building fund or community outreach project.
- Legal implications: Churches must adhere to the donor’s restrictions when using these funds. Diverting them for other purposes can lead to lawsuits or legal penalties.
Case Study: St. Paul Catholic Church
In the aftermath of Hurricane Katrina, St. Paul Catholic Church raised funds specifically for rebuilding its church. However, the funds were later diverted when the church decided to merge with another parish and abandon rebuilding plans.
Donors filed lawsuits alleging misrepresentation and improper fund use. The Mississippi Supreme Court ruled:
- Churches cannot use donor-designated funds for purposes other than those explicitly stated without donor consent.
- Donors may have the legal right to reclaim contributions if the church fails to use them for the designated purpose.
Legal Precedents
Over the past 150 years, several court cases have addressed the misuse of donor-designated funds:
- Adler v. Save: Donors successfully reclaimed funds when a charity failed to meet conditions tied to their donation.
- Tennessee UDC v. Vanderbilt University: A university was required to either honor the original conditions of a gift or refund its current value to the donors.
- Estate of Champlin: A Maine court ruled that unreasonable delays in fulfilling the purpose of a restricted donation could constitute grounds for refunding the donation.
Implications for Churches
Churches face serious risks if they fail to honor donor restrictions:
- Legal liability: Donors may sue to reclaim their contributions.
- Loss of trust: Mismanagement of funds can damage a church’s reputation and donor relationships.
- Tax compliance: Returning contributions can have tax implications for both the donor and the church.
Best Practices for Managing Designated Funds
To avoid potential issues, churches should:
- Clearly document and honor donor restrictions.
- Seek donor consent before repurposing funds.
- Include disclaimers in solicitation materials, such as: “Donations may be redirected if the project is canceled or overfunded.”
- Consult legal counsel before making decisions about restricted funds.
FAQs on Diversion of Funds
1. What constitutes a “diversion of funds”?
Using donor-restricted funds for purposes other than the donor’s specified intention without their consent.
2. Can a church legally redirect restricted funds?
In most cases, no. Churches must use these funds as specified or seek donor consent for redirection.
3. What happens if a donor cannot be identified?
If a donor cannot be identified, the church may need to seek court approval to redirect the funds under specific guidelines like the Uniform Prudent Management of Institutional Funds Act (UPMIFA).
4. Can donors reclaim their contributions?
Yes, donors may reclaim their contributions if the church fails to use the funds for the designated purpose or abandons the project entirely.
Conclusion
Churches have a legal and ethical responsibility to honor donor-designated funds. Mismanagement can lead to legal disputes, loss of trust, and financial challenges. By following best practices and consulting with legal experts, churches can ensure compliance and maintain donor confidence.
