Redesignating Restricted Funds
Faith Foundation has received several inquiries regarding re-designating restricted funds, such as those held in an endowment. We never recommend invading an endowment for use beyond its original purpose-- not even if your church is strapped for cash. If, however, your church has restricted funds which can no longer be used for the donor's original charitable purpose, then it's good to know your options. Our goal is to provide a "100-mile-view" for you, not to prevent you from seeking legal advice if you need additional information specific to your context.
Some churches have quasi-endowments that were designated as such by an act of the charge conference. If the original gift was undesignated or unrestricted, and your charge conference was the entity that placed a restriction on it, then a change to the designation can be done simply by a vote of the charge conference at a regular or special called meeting.
In contrast, funds with restrictions put in place by the donor are subject to different legal requirements. These are described in a legal code called the Uniform Prudent Management of Institutional Funds Act (or UPMIFA for short) which was introduced in the mid-2000s. All four of the states that Faith Foundation serves have adopted this legal code. It provides for a process which institutional investors can use for “release or modification” of these gifts in cases where the original designation has become “unlawful, impracticable, impossible to achieve or wasteful.”
When your church is offered a gift with a restriction placed on it by the donor, it has two choices. Either it must agree to do what the donor intends with the gift, or it must disclaim (refuse to accept) the gift. Otherwise, its legal status as a nonprofit organization may be compromised. If your church has already accepted a restricted gift, that ship has sailed. It’s as if the church has entered into a legal contract with the donor to follow their intentions. If the donor is still living, any release or modification requires their written permission.
If the donor is no longer living, the UPMIFA code clearly states that your church still has a legal responsibility to use the gift in a way that is “consistent with the charitable purposes expressed in the gift instrument.” In other words, you must honor both the letter and the spirit of the original gift. For example, while you can’t liquidate your seminary scholarship endowment and use it for operating expenses, you could make an argument for modifying it to use for Christian Education, and using its earnings to help cover the parts of your annual budget that support biblical literacy and an understanding of church history and theology.
The process of the release and modification -- and the entity that has authority to do it -- depends on the age and amount of the gift. If the gift is old enough and small enough, it may be eligible for a streamlined process. Each of our four states has different criteria:
Washington: 20+ years old AND less than $100,000 (this number increases on July 1st every year by $2,500)
Oregon: 20+ years old AND less than $25,000
Idaho: 10+ years old AND less than $25,000
Alaska: 20+ years old AND less than $50,000
If the gift meets your state’s criteria, your church has the authority to release or modify it simply by notifying the Attorney General’s office and allowing 60 days (or 90 days in Alaska) for a response. If there’s no objection, your church can move forward as long as it keeps a good paper trail.
If the gift does not meet the criteria listed above, then it can only be released or modified by a court of law. Your church must file a petition to your local Superior court. The court will notify the Attorney General’s office, and if the Attorney General disagrees with your church’s proposed release or modification, they will have an opportunity to be heard in court, alongside a legal representative of your church. A judge will hear both arguments and make a final decision.
Whether your church works directly with a living donor, notifies the Attorney General and allows 60 days for a response, or petitions the court, it’s crucial to keep excellent records. There is legal precedent for family members of a deceased donor to pursue enforcement of the terms of a restricted gift. If the donor’s heirs are still part of your community, it’s a good idea to be forthright with them and solicit their input about how to honor the gift’s intended purpose. We pray that your church will never be in a legal battle with the heirs of a donor, but it would be irresponsible of us not to warn you of that possibility. Proceed with caution.
This is a complex issue. You can call Faith Foundation at 800-488-4179 if you need to talk through it. We don’t have all the answers, but we’re here to dialogue, research, refer to experts, and learn alongside you.
The advice given here is general in nature and is not intended as legal advice or a complete analysis of the topic. Every situation is different. Before considering using donated or bequested funds for a purpose not originally intended by a grantor, an experienced attorney must be consulted for advice on your specific situation.