Assets donated to a charity can be unrestricted (or available for general use), or they can be temporarily or permanently restricted as to what they can be used for (purpose restricted) or as to when they can be expended (timing restricted). Do you want to understand how donor restrictions arise and how they can be avoided or minimized? Then, read on.
Donors place restrictions on assets that they give to a charity in accordance with a “gift instrument”. Ohio law defines a “gift instrument” broadly. Generally, a gift instrument is any type of written or electronic record under which property is granted to, or transferred to, the charity. A gift instrument could include restrictions provided in a letter or e-mail to the charity with the donation, a restriction or direction provided in the memo line of a donation check, or a direction contained in a Will, Trust, or other estate planning document in which the assets are transferred to a charity.
If any timing or purpose restriction is unreasonable or undesirable, the charity can refuse the donation or work with the donor to revise the restriction in a way that is desirable for both the donor and the charity. Regardless, the charity should pay attention to any potential gift restrictions when receiving a donation and thoughtfully determine whether the donation (and, by extension, the related restrictions) should be accepted.
The charity and the donor could enter into a gift or fund agreement that governs the donation, including setting forth any purpose and timing restrictions on the donation. These agreements could include provisions that provide flexibility to the charity going forward to change or lift any restrictions on the donated assets. For example, the agreement could include a provision that allows the charity to unilaterally amend the restrictions in certain circumstances or the agreement could include a provision allowing the agreement (including any asset restrictions in the agreement) to be amended by the charity and the donor or others. It is important for a charity to give thought to the provisions in its gift and fund agreements so that the charity can administer the assets governed by its agreements as efficiently and effectively as possible.
Most surprisingly, perhaps, is the fact that a charity’s own solicitations for donations can restrict donations. Thus, if a charity conducts a fund drive for a specific purpose and solicits donors accordingly, donations provided to the charity in response to any such solicitations are restricted for that purpose. For instance, any funds provided to a charity in response to a solicitation for funds to renovate a charity’s building must be used to renovate the charity’s building and not for other purposes. As a result, when a charity puts together any solicitation or fund drive materials, the charity should consider how such materials will restrict the assets it receives. Generally, the more details contained in the solicitation, the more restrictions that will be applicable to the donations received in response to the solicitation.
Overall, it is important for a charity to understand how donor restrictions arise. With this knowledge, a charity can minimize unwanted restrictions, whether by being cognizant of donor restrictions before accepting donations, including the appropriate provisions in its gift and fund agreements, or by crafting solicitations in a way that will not unduly tie the hands of the charity. It’s a best practice to seek the right legal counsel, especially when crafting gift and fund agreements and solicitations, to ensure that the charity has as much discretion as possible to redirect donations as needed.
Amie Vanover, Partner, Thompson Hine
