As a charity, you may prefer unrestricted donations, as you can determine how to best use those funds at your own discretion. However, you may come across a restricted fund donation when a donor wishes to restrict their gifts for a specific purpose, such as leaving a legacy gift.
Let’s break down the types of restricted funds you may receive and discuss the legal obligations which accompany restricted donations:
- Temporarily Restricted: A restricted donation that is typically time-bound, meaning it can be used for a specific purpose within a specified period. When the time allowed has expired or the project is complete, the money becomes unrestricted or stopped. For example, the completion of a building project.
- Permanently Restricted: a restricted donation that never expires which means that the charity invests the gift and then uses the interest earned to fund a specific purpose. These funds usually go into an endowment that supports specific projects or activities within your organization.
Your Legal Obligations
You are required by law to honor a donor’s wishes. If a donor restricts a donation and the nonprofit does not comply, the donor can demand a refund and they can take legal action, if needed.
You are also obligated to keep track of restricted funds and report it appropriately on your financial statements. Is it time for you to revisit any restricted funds in your books? Maybe it is time to reevaluate older funds? Maybe the goals of your organization have changed, or the fund is no longer relevant?
Speak with one of our team members about your options for how to deal with outdated restricted funds or if you have any questions about reporting restricted funds on your financial statements. Call us today at 1-866-822-9992!
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