By Cecilia Spencer, CPA, Manager, at Blue & Co.
Not-for-profit organizations often receive funds with specific restrictions on how they can be used. These restrictions ensure that the donor’s intent is honored, and that the funds are used for their designated purpose. However, situations may arise where a not-for-profit organization needs to change these restrictions due to evolving needs or unforeseen circumstances.
Reasons for Changing Restricted Funds
There are several reasons why a not-for-profit might seek to change the use of restricted funds:
Change in Program Needs: The original purpose for the funds may no longer be relevant or necessary.
Organizational Shifts: Strategic changes within the organization might necessitate a reallocation of resources.
External Factors: Changes in the external environment, such as new regulations or economic conditions, might impact the feasibility of the original purpose.
Considerations When Seeking to Change Restrictions
Changing restricted funds in a not-for-profit organization is a complex process that requires careful planning, legal compliance, and ethical consideration. The organization must consider the donor’s intent and the potential impact on its reputation, as well as legal requirements. Maintaining donor trust is crucial for long-term sustainability. Therefore, any changes should be made with the utmost integrity and transparency. Organizations should follow a structured approach and seek to maintain full transparency throughout the process.
Here are some guidelines to follow if your organization is facing potential changes related to their restricted funding:
1. Understanding the Original Restrictions
First and foremost, it’s essential to thoroughly understand the original restrictions placed on the funds. These can include purpose restrictions (funds must be used for a specific program or project), time restrictions (funds must be used within a certain period), or other donor-imposed limitations. Reviewing the donation agreements and consulting with legal counsel can help clarify these restrictions.
2. Legal Considerations
In some cases, changing fund restrictions may require legal approval, especially if the original donor is no longer available or if the funds are part of an endowment. Consult with an attorney specializing in non-profit law to navigate any legal requirements. Courts can sometimes authorize changes to fund restrictions under the doctrine of cy-près, which allows modifications when the original purpose becomes impractical or impossible to achieve.
3. Seek Donor Consent
Open communication with the donor is crucial. Reach out to the donor to discuss the organization’s current needs and explain why the original restrictions may no longer be viable. Transparency about the situation and how the funds could be better utilized can often lead to a mutual agreement to amend the restrictions. If possible, the organization should reach out to the donor to discuss the need for change.
4. Document Donor Communications
If the donor agrees to modify the restrictions, obtain their written consent. This formal agreement should detail the new terms and conditions, ensuring that both parties are clear on the changes. It’s important to document this consent thoroughly to avoid any future misunderstandings or legal issues.
5. Board Approval
The organization’s board of directors should be involved in the decision-making process. Present the case to the board, including the reasons for the change and the potential impact on the organization’s mission. Obtain formal approval from the board to proceed with modifying the fund restrictions. This step ensures internal accountability and alignment with the organization’s governance practices.
6. Update Documentation
Once the new restrictions are agreed upon and approved, update all relevant documentation. Proper documentation is essential. This includes recording the reasons for the change, the approval process, and any communications with the donor. This documentation should be kept on file for future reference and auditing purposes. Also include financial records, donor agreements, and any public disclosures such as the organization’s annual report. Clear and accurate documentation is essential for maintaining transparency and accountability to donors, stakeholders, and regulatory bodies.
7. Communicate the Change
Inform key stakeholders about the change in fund restrictions. This includes staff, beneficiaries, and potentially the wider community, depending on the significance of the change. Effective communication can help build trust and demonstrate the organization’s commitment to its mission and to responsible stewardship of donor funds.
8. Monitor and Evaluate
After implementing the new restrictions, continuously monitor and evaluate the impact of the changes. Ensure that the funds are being used effectively and that the revised restrictions are serving the intended purpose. Regularly reporting on the use of these funds can help maintain donor confidence and support.
By following these guidelines and seeking legal approval, organizations can responsibly adapt to changing circumstances while honoring the intent of their donors and ensuring their mission is achieved.
If your organization is navigating the complexities of modifying restricted funds, Blue & Co. is here to help. Our experienced advisors understand the challenges involved and can help provide tailored guidance to ensure your organization maintains transparency, compliance, and donor trust.
Contact your Blue & Co. advisor today to discuss how we can support your efforts.
