The Biggest Challenges Of Restricted Gifts And How You Can Handle Them

Restricted Funds

A special thanks to Dan Busby, CEO of ECFA, for his contributions to this post to ensure accuracy on this topic.

A significant part of being involved in the church is giving. Giving is not only important to the church because it funds its ministry, but it is also a vital part of the Christian faith. The Bible has much to say about stewardship and how it blesses the individual. As church leaders, we want to avoid discouraging someone from giving.

Understanding restricted gifts and their related challenges can help you and your church determine the most effective way to handle donations that are restricted. Here are three commonly asked questions about restricted gifts.

1. What are restricted gifts?

The terms restricted gifts and designated gifts are synonymous – the term restricted gifts is used in this blog. 

A restricted gift is for a purpose more specific than the broad limits imposed by the church’s purpose and nature. [1] Since the purpose and nature of a church is generally very broad, there is a wide possibility for restricted gifts. Here are just a few possibilities: gifts restricted for the missions fund, the debt-retirement fund, the building campaign, and many more.  Additionally, a gift may be restricted as to time – for example, a gift made in one year may be restricted for use until a subsequent year.

Givers restrict gifts and can unrestrict their gifts. Church boards do not have the power to restrict gifts. When a church receives a restricted gift, it is out of the control of the giver. The church becomes responsible to spend the money in a timely basis and within the limits of the giver’s restriction. If your church accepts a restricted gift, it is imperative to track that donation. While it is unnecessary to physically put money in a separate account, your giving tracking or accounting software should have the capability to track the funds.

Giver-restricted gifts are generally tax-deductible as a charitable contribution. There are exceptions:

  • “I want to give $10,000 to the church so the funds can be passed on to a college to cover the tuition for the pastor’s daughter.” This gift is earmarked for a non-ministry purpose and it does not qualify for a charitable contribution. Therefore, this gift should not be accepted by the church.
  • “One of my friends has a financial need. I want to give the church $2,000 so the church can pass it through to them.” This gift is earmarked for a particular individual and it does not represent a ministry expense for the church. The gift does not qualify for a charitable contribution deduction and it should not be accepted by the church. [1]

Churches should avoid accepting gifts restricted for an individual. For example, gifts may be accepted for a benevolence fund but not for individual benevolent recipients. Gifts may be preferenced for a particular needy person, leaving the church to decide how the gift will be distributed to the needy. Gifts may be preferenced for a certain missionary supported by the church, leaving the church to decide which missionary will be supported.

2. Should a church limit the restricted gifts it will accept?

Most churches accept restricted gifts – at least, certain types of restricted giftsHowever, some churches limit giving towards a unified budget or to the church’s operational budget. In these instances, the church may choose not to accept any restricted gifts or significantly limit the types of these gifts that they will accept. While this requires trust on the part of the giver, it gives the church the freedom to spend donations in the way that best aligns with the vision and mission of the church.

If a church accepts restricted gifts, it is generally wise to identify the purposes for which gifts will be accepted. The absence of limits on restricted giving could have two detrimental effects:

  1. It could leave a church with strong giving for restricted purposes and too little giving for the operational budget.
  2. Givers could restricted gifts for projects that are not a high priority—or not a priority at all—for the church. For example, with no limits on restricted gifts, a giver could make a gift for a building addition that the church has no plans to construct.

So, yes, if a church accepts restricted gifts, church leadership should clearly define the acceptable restricted gift purposes. These purposes may be modified from time-to-time as circumstances change.

3. How should a church handle the challenge of restricted gifts?

Restricted gifts are often helpful to churches but they must be handled properly to avoid problems. Here is a summary of the seven restricted gift basics:

  1. If your church is going to limit or decline restricted gifts, include this in the church’s over-all Gift Acceptance Policy.
  2. If your church is going to accept restricted gifts:
    1. consider specifying the type of gifts that will be accepted,
    2. determine if the church will reduce restricted gifts for expenses incurred to raise and use the gifts.
  3. Commit to track all restricted gifts in terms of revenue and expense.
  4. If you have unused restricted gifts (restricted net assets) and you don’t foresee your church using (new organ fund, anybody?), obtain professional counsel for next steps.
  5. When raising restricted gifts, clearly communicate to givers how the gifts will be used.
  6. Be prepared to provide a summary report to restricted givers with respect to how much restricted gifts were received and how they were used.
  7. Remember, the inclusion of a statement on giving envelopes and online giving platforms that declares that the final decision on spending of donations is made by the church does not relieve the church from treating the restricted gifts as restricted.

Handling restricted gifts by a church can be daunting, but there are steps you can take to make sure you handle them well.

How can your church better handle restricted funds?

[1] Dan Busby, Michael Martin, John Van Drunen, The Guide to Charitable Giving for Churches and Ministries: A practical resource on how to handle gifts with integrity (Winchester, VA: ECFAPress, 2015), 300.

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