Restricted donations are one of the most common sources of confusion for churches handling their finances. Churches, like all nonprofit organizations, rely on monetary donations to carry out their basic functions — these gifts are what literally keep the lights on. This article focuses on what a church may actually do with the funds it receives, and doesn’t address fundraising through bingo or raffles.
Unrestricted Funds
In most instances, a member simply donates funds toward the church’s general operations — utilities, salaries, and other operating costs. Once a donor makes a monetary donation, those funds generally become the property of the church, which is then free to spend them without needing the donor’s ongoing authorization — unless the gift was given for a specific, designated, or restricted purpose. A donation is tax-deductible in the first place because the IRS treats it as an irrevocable gift to a charity. If the donor doesn’t want the deduction, the church is governed solely by state law instead.
Restricted Donations vs. Unrestricted Funds
Unlike unrestricted funds, restricted donations can only be used for the specific purpose the donor designated — whether that restriction is temporary or permanent. Only the donor who gave the funds can determine whether they’re actually restricted.
If a check arrives with no notation or memo, those funds can reasonably be treated as unrestricted. But if the check includes a notation, or comes with a cover letter specifying the funds are for a new roof, that’s how the church must spend them.
Once the check is deposited, the church needs a real plan for that new roof. Spending any portion of restricted donations on anything else is, at minimum, a breach of fiduciary duty — and can constitute fraud.
What if the church already has a new roof? The church can return the check to the donor, ask whether the donor would consider redirecting the gift (having them write “Suggested for” in front of “new roof” on the memo line removes the legal obligation), or simply hold the funds for the inevitable future roof replacement.
What if there’s a surplus after the roof is finished? The church needs written permission from the donors before directing any leftover restricted donations elsewhere.
Who Decides Whether Restricted Donations Can Change Purpose
Under California law, the first question is whether the restriction was imposed by the donor or by the church itself. A church can only remove a donor’s restriction one of three ways: (1) written permission from the donor, (2) court order, or (3) for smaller or older funds, formal notice to the state Attorney General under Probate Code §18506. If the church imposed the designation on itself, it remains bound by that same designation and can only remove it through one of those same three paths.
Borrowing From Restricted Donations
Continuing the roof example: the church might be tempted to tap funds designated for a future roof to cover an unexpected, unrelated expense. However good the intentions, doing so without authorization is illegal and can constitute fraud, regardless of need. The right move is contacting the donor and requesting written permission to redirect the gift — though at that point, the donor may instead insist the funds go toward the roof as originally intended, or ask for the gift back.
Written Policy on Restricted Donations
Every church should adopt a written policy for handling designated gifts. Within reason, that policy should state the board may remove restrictions on gifts when doing so serves the church’s best interest, and should appear in all donation and fundraising materials, including gift receipts.
With that policy in place, the church board can vote to redirect surplus funds once the original purpose — like the roof — is complete. It’s also an effective tool when a donor has died or can’t be located to authorize modifying their restricted donation.
Conclusion
A restricted gift is exactly that — restricted. Spending it inappropriately can trigger legal action from either the donor or the Attorney General, and beyond returning the gift, the church may face liability for punitive damages and attorney’s fees.
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Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.
