Restricted and Unrestricted Donations: What’s the Difference?
Donors have the power to move an organization or support a cause. Donors can determine how their gifts can make an impact with an organization that aligns with their passion. Organizations cannot survive without enough donations to support programs and operational expenses. You can claim ownership of the impact you would like to make, or you can give the organization some flexibility. The best gifts you can make to any organization are the ones with no strings attached.
Restricted Funds
Restricted funds are donations that can only be used for specific projects or purposes. There are two types of restricted funds: temporarily restricted funds (money is time-bound or expires when the project is completed) and permanently restricted funds (money is invested in a long-term endowment where the interest earned is used to fund specific projects or the general fund).
Donor’s Perspective: If the donor understands which programs or projects they would like to support, then they can indicate where their gifts should go. The organization must follow the donor’s wishes, or it may have to return the donation. However, some donors want to hold the organization accountable, so they indicate specifically how their donations should be used.
Organization’s Perspective: Sometimes organizations would like to know which programs donors are passionate about, so the organization will outline in its solicitation letter different gift options for donors to choose from. On the other hand, the organization may reject a donor’s restricted gift if the request is unethical, will incur additional cost, and/or its particular program no longer needs funding.
Unrestricted Funds
Unrestricted funds are donations that can be used for any purpose or program. There are no strings attached, and the organization uses the money any way it sees fit.
Donor’s Perspective: If the donor wants to give the organization flexibility and allow the donation to go where the need is greatest, then unrestricted funds will help. The donor will join other donors to make the greatest impact through unrestricted funds.
Organization’s Perspective: Unrestricted funds give the organization the capacity to move money around and use it for various purposes, especially when it cannot use any of the restricted funds for operational expenses and staffing. The benefits of unrestricted funds can help during a disaster, emergency, or crisis situation. It can also provide the organization with stability and longevity.
How does a restricted or unrestricted gift help or hurt the organization’s budget?
Supposedly, a majority of donors focus on giving restricted gifts to three different programs within an organization. Some programs may need more or less money than others. See the graphic below as an example. Texts highlighted in red means there are not enough funds to meet the goal.
The organization must use the restricted gift for the intended programs and nothing else. If donors gave so much to program B, the organization cannot reallocate surplus funds to other programs. The Internal Revenue Service will penalize the organization for any misuse of restricted funds. So, the extra money in program B will sit there for a long time or until program B spends it all.
Take a look at mortgage or staffing expenses. The organization has to raise money from other sources to cover those expenses. If the organization is not successful in fundraising for different expenses, that can cause stress or a possible shutdown. It will be helpful for donors to consult with the organization’s development team on where in the budget it has the greatest funding needs before making a restricted gift, even though the organization will honor and respect each donor’s intent.
Let us suppose the organization has successfully secured $1 million in unrestricted gifts. The organization’s finance director will distribute portions of unrestricted funds to different expenses in the budget. See the graphic below as an example. Texts highlighted in green demonstrate how unrestricted funds were allocated.
The organization was able to allocate some unrestricted funds to program A, mortgage, and staffing. Any additional unrestricted funds will be placed in a savings account or a reserve fund that will keep the organization operating in the next few years. Unrestricted funds give any organization greater flexibility to adapt to any situation.
Pop Quiz:
Which donations are considered restricted or unrestricted gifts?
University scholarship: Your university has established an endowment scholarship that will support students who are actively involved on campus. You decided to make a gift for that scholarship. What kind of gift are you making?
Answer: An endowment scholarship is usually a permanently restricted fund because the interest earned over time pays out in scholarships to students.
Children’s program: Your local organization is in need of art supplies and toys. You decided to make a gift to support the children’s program. What kind of gift are you making?
Answer: Supporting a particular program is considered using temporarily restricted funds. Your intention was to help the children’s program purchase art supplies and toys.
Gifts in memory of or in honor of: There is someone who is special to you, and you wanted to make a gift in their memory or in honor of them. You send a check that doesn’t specify where the money should go but asks the organization to make an acknowledgment. What kind of gift are you making?
Answer: Your gift is considered unrestricted. The gift becomes a temporarily restricted fund if you include a note that indicates which programs to support. Either way, the organization will make an acknowledgment on its website, in its annual reports, or on a plaque with other names.
Capital Campaign: Your local organization has launched a campaign to build a new apartment for its clients. You made a monthly pledge to continue supporting the campaign until the open house. What kind of gift are you making?
Answer: Gifts made to capital campaigns are usually temporarily restricted funds because donors are collaborating toward the organization’s goal. In this case, to build an apartment. On the other hand, monthly pledges can be restricted or unrestricted depending on the donor’s agreement with the organization.
Real estate donation: Your grandparents wanted to transfer their 5-bedroom mansion to an organization they are very passionate about. What kind of gift are they making?
Answer: It depends on how the property is transferred. Most organizations would first assess the market value of the property and any costs to maintain or repair it. If the organization is not able to afford the cost of repairs or ownership, it is very likely that the organization will reject the gift or will advise the donor to sell it first. On the other hand, some organizations might see the benefit of procuring a property of value (for example, a well-known alumnus donates their house to a university to be used as a social gathering place). However, all real estate gifts involve consultation with the development team, lawyers, and real estate agents before proceeding with the transaction. If the organization accepts the property and sells it, then the profits become an unrestricted fund.
A check made out to the organization - You came across an organization’s website explaining its missions and programs. You love the impact the organization is making in the community, so you write a check to the organization directly. What kind of gift are you making?
Answer: Your check (or cash donation) is considered unrestricted unless you include a note on where the donation should go.
Our Spark Group consultants specialize in fundraising and procuring different types of gifts. If you are looking to write a donor agreement or discuss how to make a meaningful gift to a cause you are passionate about, we can help. We can also provide budget and fundraising consultation with the organization’s finance director or development team. Contact Spark Group Consulting for a 30-minute chat today!
