What Nonprofits Need to Know About Donor-Restricted Contributions

When donor restrictions no longer align with current priorities, understanding your available options can help protect programs, support day-to-day operations, and strengthen your organization’s financial flexibility while remaining a good steward of donor restrictions and intentions.

A thoughtful approach to restricted funds can uncover opportunities within existing resources and shape more practical fundraising decisions. Learn key considerations that can help make donor-restricted contributions work harder for your mission.

Why can donor-restricted and conditional contributions be problematic?

Donor restriction and conditions limit how contributions can be used

Donors have the ability to restrict their contributions. Your organization may run fundraisers or campaigns to solicit contributions for certain needs, but only the donors can place restrictions on their contributions.

Donor approval to modify restrictions or conditions may be difficult to obtain

Donor-restricted contributions (such as endowments) are often made as part of a bequest or will arrangement effective after the donor’s death. That can make it difficult when your organization would like to seek the donors’ permission to repurpose the contributions.

Restricted funds may be unavailable when they’re needed most

Donor-restricted contributions are great when operations and programs are running effectively, but they can create significant limitations for organizations simply trying to survive. While an organization may have cash available, those funds may be restricted based on the donor’s initial intent.

How can nonprofits address the challenges of donor-restricted contributions?

Review existing restricted funds before setting fundraising goals

Many organizations accumulate restricted funds over time without periodically reassessing how those restrictions align with current needs. Reviewing net assets with donor-restrictions can help management understand which funds remain restricted, how they’re being monitored, and whether restrictions continue to support your organization's mission.

• Before setting specific fundraising goals or expectations for the coming year, evaluate what’s currently available for use given existing restricted funds for programs.
• If a restriction no longer fits your organization’s programmatic activities, the available path may depend on whether the donor can be contacted, whether the fund meets state criteria for modification, and whether court or attorney general involvement is required.
• When it comes to endowment gifts, it’s crucial to understand the state of incorporation and the state law governing endowment restrictions under the Uniform Prudent Management of Institutional Funds Act (UPMIFA). This law can vary slightly from jurisdiction to jurisdiction, but the overarching law covers:
  • Endowment spending,
  • The release of endowment funds, and
  • The change or termination of endowment restrictions when they become inappropriate to the needs of the organization. These changes require the original donor for a release from the donor-imposed restrictions on an endowment or petitioning a court for such a release.

Ask the donor to modify a gift restriction

Review the restricted funds on your statement of financial position and consider reaching out to the donors to see whether they’re willing to modify or release an existing restriction. Capture any changes in writing, as an addendum to the original gift documentation.

Work with legal counsel when donors are unavailable

For those restricted funds where the donor is deceased, consult with legal counsel to see what options may be available.

Gain deeper insight into nonprofit performance with fund-level reporting. Read our article.

Review the criteria for modifying endowment restrictions

Depending on applicable state law, UPMIFA may provide a process for modifying certain older, smaller institutional funds without court approval. Eligibility requirements, dollar and age thresholds, notice requirements, waiting periods, and other conditions vary by state. Consult legal counsel before modifying or releasing a donor restriction.

Next steps for strengthening nonprofit funding flexibility

As your nonprofit plans for the coming years, take practical steps to strengthen funding flexibility. These actions can be easy to overlook when teams are focused on immediate demands, yet they can support more responsive financial decisions.

Align fundraising requests to needs

Identify your organization's most pressing needs and align fundraising priorities accordingly. Update gstandard donor documents used. Carefully drafted fundraising requests can provide greater flexibility in how contributions may be used while giving donors clear opportunities to support high-priority initiatives.

Engage grantors early in the grant cycle

Ask grantors if there is any flexibility in how funding can be used and when you may be able to access it. Have these conversations early in the grant process to gain a better understanding of your funding sources.

Remember the grantors are going through the same challenging times, so an honest and vulnerable conversation upfront may help increase trust and cooperation and help them better understand the current situation.

Review your organization’s board-designated funds

Management and those charged with governance should have frequent and honest conversations about what reserves look like and what designations need to be maintained or what can be altered.

Have these conversations during the budgeting and cash modeling process to help alleviate stress on the development and management teams and help set realistic donation goals for the coming year.

If existing board designations no longer align with the nonprofit's current priorities, consider whether management and those charged with governance should revisit those designations before seeking changes to donor restrictions or requesting additional restricted gifts.

This gets close to specific legal advice, while simultaneously acknowledging that the requirements vary by state. The wording can leave the reader with the impression that satisfying a dollar threshold + age threshold + charitable-purpose

Review endowment spending policies

Endowment spending policies should be periodically reviewed to ensure the policy is clear and the methodology is consistently able to be calculated. What’s more the policy should consider prudent spending based on the duration and preservation of the fund, economic conditions, expected total return, and alignment with the investment policy.

Reviewing spending policies and plans is at the heart of a governing body’s fiduciary responsibility toward the organization they serve and its role in the community.

Build a more flexible funding strategy

Donor-restricted contributions can be a powerful tool for advancing your organization's mission; however, restrictions can also limit an organization's ability to respond to changing circumstances or fund day-to-day operations.

Nonprofit leaders should strive to maintain a healthy balance between funding that does and does not have donor restrictions.

How CLA can help nonprofits with restricted funds

Nonprofit leaders may struggle to track restrictions, assess available funds, and align grant requirements with changing operational needs.

CLA can help review restricted assets, provide observations on fund accounting, and help management evaluate considerations related to spending, reserves, and donor documentation.

Our grant management services can also support compliance, reporting, and reimbursement processes, helping your team reduce administrative strain and put funding to work as intended.

Contact us

Align restricted contributions with changing needs and make available funds work harder for your mission. Complete the form below to connect with CLA.