Church Funds and Donor Intent

Church operations and ministries can be funded through offerings and donations, investment income, and grants. Some churches may also have other income streams like rental income or income from a church-run business. This article focuses on the legal obligations of churches to donors who give money to support the church or specific ministries of the church.

Church members and visitors giving money during a Sunday offering or as part of an annual giving commitment are typically giving funds to the church that can be used for any legitimate church purpose, such as operations, overhead, and ministry. Some donors may also make large gifts to the church that the church may use for any purpose. These funds are called unrestricted funds.

Sometimes, donors give funds for a particular purpose. The following is a fictional story, but some United Church of Christ churches have had similar experiences. Has your church experienced this?

Six years ago, First Congregational Church told its members it needed to raise $50,000 for immediate repairs to the building’s steeple. The congregation responded generously, and the church raised $9000 more than was necessary to complete the repairs. The church tracked the money separately. Now, the church is focusing on its immigrant-outreach ministry and has identified several purchases it needs to make, including the purchase of a van.

“No problem,” a council member said. “We can use the leftover funds from the steeple repairs to make the down payment. The money has just been sitting there for six years.”

“Well,” said another council member, “I heard you can’t use donations that were given for a specific purpose for anything else. I think we should get some advice on this.”

“It seems weird to me that the church couldn’t use donations just sitting there in its account,” said the first council member. “But okay, we can check it out.”

Restricted Funds

When a donor gives money to a church and identifies a specific purpose or use for the money, the church is legally obligated to use those funds for that purpose. These funds are called restricted funds. The donor can convey their intended use for the money at the time they donate the money through a written or verbal communication to the church, or even through a notation on the memo line of a check or on an offering envelope. For example, if a church member writes “for a new piano” on the offering envelope, the church is obligated to use the money for a new piano or to return the contribution. 

Some churches specifically invite contributions that are restricted to one of the church’s ministries— for example, the church’s food pantry, youth outreach program, or music ministry. A church may conduct a campaign to raise funds for building repairs. A church may also raise funds for disaster relief. Donations received in response to these invitations are also restricted to these purposes. A church should consider including an explicit statement in its invitation to give that funds raised in excess of funds needed for the specified purpose will be used for other charitable church purposes, so that the church is not left with money that it cannot use because the need no longer exists.

Churches should track restricted funds separately and not commingle them with unrestricted funds.

Gift Agreement and Gift Acceptance Policy

When a donor wants to make a restricted donation larger than a certain amount— as determined by the church— the church may consider entering into a gift agreement with the donor. Such an agreement should contain a clause that gives the church some discretion to redirect the purpose of the donation if the church is unable to fulfill the donor’s original intent. While a church can always go back to the original donor and ask if the donor will agree to change the restrictions on their donation, sometimes the church is not aware that it will not be able to fulfill the donor’s intent until the donor has passed away. A gift agreement can ensure the donor’s intent to allow the church to be flexible is documented. 

The church’s acceptance of restricted gifts may also be governed by a gift acceptance policy. This policy, adopted by the governing board of the church or the appropriate body according to the church’s bylaws, provides guidance on what types of gifts the church will accept, and when a gift agreement is required. It may prohibit the church from accepting gifts with certain restrictions, or even certain types of gifts. 

For example, some churches may not want to immediately accept a gift of real property, because of the time and expense that comes with disposing of it. Instead, the policy may require an appraisal and environmental surveys prior to the church accepting it. No church is required to accept a gift or even a bequest that the church believes will be difficult or expensive to administer. Some individuals do attempt to donate certain types of property to charities for tax purposes and leave the charity with the difficult job of converting it to cash. The church may have to spend more money than the property is worth to maintain and insure it during the sale process. But, in the meantime, the donor can take advantage of a tax deduction.

Endowments

Some churches have a special type of restricted fund called an endowment. An endowment is ordinarily a permanently restricted fund intended by donors to perpetually fund the church. Donor contributions to the endowment are invested, and a church can use the income from the investments, but not the principal, to support the church’s operations. Sometimes the church can use a specific percentage of the value of the fund, typically less than 5%. Endowments can have terms or spending policies that are different from this general principle, so it is important for churches to be aware of what their endowment permits. Remember that donors contributed money to the endowment with the intent that it would fund the church for the long term.

Nearly all states have adopted a version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). The versions vary from state to state so be sure to check your state’s laws. UPMIFA applies to church endowments and other restricted funds that, under the terms of gift instrument, cannot be wholly expended by the church. Under UPMIFA, churches are required to follow the donor’s intent, and to exercise prudence in the investment, management, and expenditure of the funds. Some state UPMIFA laws create a rebuttable presumption the spending is not prudent if it exceeds a certain percentage of the fair market value of the fund. Churches should be sure to establish spending policies for its endowment and restricted funds that align with UPMIFA.

Returning Unused Contributions or Modification of a Donor’s Intent

If a donor specifies an intent for the funds which the church cannot reasonably use— for example, if the church does not plan to purchase a new piano, or the funds raised for a building repair exceed what is necessary— the church can discuss the church’s current needs with the donor and the donor can consent to a different use, or the church can return the contribution to the donor. (If a church has already issued a receipt for the donation, the church is required to issue an IRS Form 1099-Misc to the donor for donations of $600 or more.) Importantly, if the donor has passed away, the donor’s heirs and executors do not have the inherent legal power to change the donor’s intent for a completed donation.

If the original donors cannot be contacted or will not consent to a different use, and the terms of the gift agreement do not provide the church with flexibility in the use of the funds (or there is no gift agreement), the church may not use these funds for any purpose other than the purpose for which the donor donated them, without following the legal processes described below to remove or modify the restrictions.

In many states, if a fund is below a certain dollar amount or if it is old (according to the criteria in the state statute), the church can approach the state’s official that oversees charities and request that official’s consent to modify the donor’s intent through an administrative process. Typically, the official is the state attorney general. Some states have an online form or submission process for these requests. The church needs to show the purpose for which the donor intended the funds has become impossible to achieve, impractical, wasteful, contrary to public policy, or illegal. The church can propose a new restriction on the fund, but the state may ask the church to propose a restriction that closely adheres to the donor’s original intent. Following review by the attorney general, the church will receive a determination on the proposal to modify the donor’s intent.

If the value of fund too large or the fund is not old enough to qualify for modification by the state attorney general, the church may need to file a petition in court to have the donor’s intent modified. The church should hire an experienced attorney to do this. While going to court may seem time-consuming and expensive, the church cannot legally use the funds for a different purpose. Check with your attorney on whether the costs and fees to modify the fund can be paid by the fund. 

In the case of First Congregational Church, a reasonable course of action is to ask the original donors to use the money for a new purpose. 

Legal Liability

If a church misuses restricted funds, including failing to honor donor intent and not following UPMIFA, the church may face legal liability:

• The state attorney general could investigate the church or bring an enforcement action against the church resulting in financial penalties.
• The IRS may impose penalties or may terminate a church’s tax-exempt (501(c)(3)) status for egregious violations.
• A donor may sue the church.

A church may also face reputational consequences and the loss of trust of its members and its community.

Resources

Here are some resources that may be useful. United Church of Christ Local Churches are encouraged to seek the advice of an attorney and an accountant in developing their own policies; these policies are intended as examples only and may not be suitable for a church’s particular purpose.

Sample Gift Acceptance Policy, courtesy of the Wisconsin Foundation UCC

Sample Fund Agreement, courtesy of the Wisconsin Foundation UCC. Note the flexibility given to the church to alter the donor’s intent if it becomes necessary in paragraph 3.

Sample Congregational Funds Policy, courtesy of the Wisconsin Foundation UCC

More information on UPMIFA

IRS Charitable Contributions Publication 526

The information provided in this article is not legal advice.  If you need legal advice, please consult with an attorney.