Churches often receive donations earmarked for specific purposes, whether it missions, building projects, or benevolence funds. While these contributions are a testament to the generosity of congregants, they come with legal and ethical responsibilities. Mismanaging these funds can lead to donor distrust, legal complications, and potential tax issues.
In this guide, we’ll dig into a few of the best practices for properly handling restricted donations and designated funds, ensuring your church remains a faithful steward of every gift entrusted to it.
Understanding Restricted vs. Designated Funds
There’s a difference between funds that are restricted vs. designated, let’s define these two.
Restricted Funds
Restricted funds are donations where the donor specifies a particular use. These restrictions can be:
- Temporarily Restricted: Funds designated for a specific purpose or time frame.
- Permanently Restricted: Endowments where the principal remains intact, and only the interest is used for designated purposes.
It’s crucial to note that only donors can impose restrictions on funds. Misusing these funds can lead to legal repercussions and loss of donor trust. Foundation Group®
Designated Funds
Designated funds are allocations made by the church’s leadership for specific purposes. Unlike restricted funds, these can be reallocated as needed, provided the governing body approves.
Best Practices for Managing Restricted and Designated Funds
1. Clear Communication with Donors
Ensure donors understand the nature of their contributions. For tax-deductible donations, the donor must relinquish control over the funds. Including a statement like the following on donation receipts can be helpful:
“This church is a qualified 501(c)(3) organization. All donations are tax-deductible to the extent allowed by law. Unless otherwise noted, you agree to relinquish control of the donated funds to the discretion of this church.” Start Church
2. Establish a Gift Acceptance Policy
Define the types of restricted gifts your church will accept. This policy should outline:
- Acceptable purposes for restricted gifts.
- Procedures for declining gifts that don’t align with the church’s mission.
- Processes for handling unused or excess funds.
Having such a policy ensures consistency and protects the church from potential disputes.
3. Accurate Record-Keeping
Maintain detailed records of all restricted and designated funds. This includes:
- Donor information and intent.
- Dates and amounts of contributions.
- Expenditures and remaining balances.
Churches need to use fund-based accounting software so that it can streamline this process and ensure transparency.
4. Regular Reporting
Provide periodic reports to donors and church leadership detailing:
- Funds received and their designated purposes.
- How funds have been utilized.
- Any remaining balances and future plans for the funds.
Regular reporting fosters trust and demonstrates accountability.
5. Handling Unused or Excess Funds
If a project concludes with leftover restricted funds:
- Attempt to contact donors for permission to redirect the funds.
- If donors cannot be reached, consult legal counsel to determine appropriate steps, which may include seeking court approval to modify the restriction. Michael Best & Friedrich LLP
Conclusion
Properly handling restricted donations and designated funds is not just about compliance, it’s about honoring the trust donors place in your church.
By implementing clear policies, maintaining accurate records, and communicating transparently, your church can ensure every gift is used as intended, furthering your mission and ministry.
If you need help creating a donation or gift acceptance policy, don’t hesitate to reach out to us here:
Note: This blog post is for informational purposes only and does not constitute legal or financial advice. For specific guidance, consult a qualified professional.
