Q: My church currently has a large surplus in its benevolence budget but a shortfall in its missions budget. The board is planning to transfer a substantial amount from benevolence to missions. But isn’t it illegal to use restricted funds for anything other than their intended purpose?
Churches often face financial challenges, such as surpluses in one budget and shortfalls in another. A common question arises: Can restricted funds be used for anything but their intended purpose? Understanding the limitations on restricted funds is crucial for complying with legal and ethical obligations while maintaining donor trust.
What Does UPMIFA Say About Restricted Funds?
Every state except Pennsylvania has adopted some version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). This model law addresses various aspects of nonprofit financial management, including the handling of restricted funds. While UPMIFA provides a framework, the law allows states to modify its provisions, resulting in slight variations across jurisdictions.
Under UPMIFA, restricted funds may only be redirected if it is deemed “unlawful, impracticable, impossible to achieve, or wasteful” to fulfill the donor’s restriction. However, proving one of these criteria can be challenging. For instance, while canceling a building project might meet the standard, it is harder to justify redirection from a benevolence fund, as the need for assistance is ongoing.
State-Specific Provisions
Some state versions of UPMIFA differentiate the process for redirecting restricted funds based on the fund’s dollar amount. For certain amounts, a court order may be required. Additionally, other state and federal laws may apply, creating potential legal risks for churches considering such redirections.
Steps for Churches Considering Fund Redirection
If your church is contemplating redirecting restricted funds, take the following precautions:
- Evaluate Policy Implications: Consider how redirection could impact member trust and relations. Even if legally permissible, it may not be wise to proceed without thorough evaluation.
- Seek Expert Legal Counsel: Obtain a written opinion from an attorney experienced in nonprofit and church law to ensure compliance with UPMIFA and any applicable state or federal regulations.
- Communicate Transparently: Clearly explain the reasoning behind any decisions to stakeholders to maintain transparency and trust.
Additional Resources
For a comprehensive discussion of restricted funds and UPMIFA, consult chapters 1, 3, 6, and 10 of Church Finance: The Church Leader’s Guide to Financial Operations.
UPMIFA guidance may vary by state. For detailed legal information, visit the Uniform Law Commission’s UPMIFA page. Additionally, review nonprofit compliance resources from IRS.gov for federal considerations.
FAQ: Limitations on Restricted Funds
- What are restricted funds?
Restricted funds are donations or contributions designated by the donor for a specific purpose. - Can restricted funds be transferred between budgets?
Generally, restricted funds cannot be redirected without meeting specific legal criteria under UPMIFA or obtaining court approval. - What happens if donor intent cannot be fulfilled?
In such cases, churches must follow legal processes, which may include seeking court approval to modify the restriction. - Why is legal counsel important in handling restricted funds?
Expert legal advice ensures compliance with applicable laws, minimizing risks and protecting the church’s integrity.