Q&A: Can restricted funds be used for anything but their intended purpose?

The decision to do so involves both relational and legal considerations.

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?
Every state except Pennsylvania has adopted a version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), a model law that addresses, among other things, investment of assets by nonprofit organizations and the handling of restricted funds. Each state’s version can vary a bit (it was up to each state’s legislature to determine whether to modify the model law).
UPMIFA contains language that addresses what to do legally when an organization has determined that it is “unlawful, impracticable, impossible to achieve, or wasteful” to carry out a donor restriction for a fund covered by the law. It might be somewhat challenging to prove that your church meets one of these four criteria with respect to its benevolence fund. It is one thing to deal with a building fund where the building project is canceled, but the needy are always among us.
Some states’ versions of UPMIFA provide different options for redirecting a restricted fund depending on the dollar amounts involved. In some cases, a court order is required. There may be other state or federal legal issues to consider—some of which could carry very significant risks.

I strongly suggest that any church contemplating the redirection of donor-restricted gifts do the following:

  1. Consider the policy implications and member relations issues that could arise even if the church were able to find a legally permissible way to redirect the funds and evaluate whether doing so would be wise.
  2. Do not take steps to redirect donor-restricted funds without a clear, well-written opinion from competent legal counsel specifically experienced in this area of law.
  3. For a detailed discussion of restricted funds and UPMIFA, see chapters 1, 3, 6, and 10 in Church Finance: The Church Leader’s Guide to Financial Operations.
Michael (Mike) E. Batts is a CPA and the managing partner of Batts Morrison Wales & Lee, P.A., an accounting firm dedicated exclusively to serving nonprofit organizations across the United States.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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