Emerging Issues for Nonprofits--Release or Modification of Restrictions on the Use of Funds
As the economy worsens and donations dwindle, many nonprofit charities are experiencing increasing financial strains just to keep the doors open. Tapping into reserves to cover general costs in tough times is not always an option. If a donor does not wish his contribution to fund administrative or general overhead costs, then the nonprofit may face hurdles to modify or obtain a release of the restriction on those restricted funds.
Mr. Wilson writes: A nonprofit that accepts a gift subject to donor restrictions must use the gift consistent with the donor's specifications until the funds are depleted. Such restricted funds must be segregated in the books from other funds to ensure compliance with the donor's intent.
Prior to 1972, the options available to modify the use of restricted funds were governed by common law concepts. A fund could seek modification from a court of law pursuant to the cy press doctrine, which required a showing that the donor had a general charitable intent and that the restriction had become impossible, impracticable, or illegal to fulfill. Impossibility usually requires a showing that the purpose for which the funds are to be spent no longer exists. A purpose has become impracticable when it appears that under the circumstances the application of the property to the designated purpose would fail to accomplish the intention of the [donor]. A charitable purpose becomes illegal if the restrictions are discriminatory with respect to race, gender, and sometimes religion.
The cy pres doctrine still applies, and has even expanded to include restrictions that have become wasteful a situation in which the amount of property held in the trust exceeds what is needed for the particular charitable purpose to such an extent that the continued expenditure of all of the funds for that purpose, although possible to do, would be wasteful. Upon such a showing that the cy pres doctrine applies, the relief is limited a court may broaden the purposes of the trust, direct application of the surplus funds to a like purpose in a different community, or otherwise direct the use of funds not reasonably needed for the original purpose to a different but reasonably similar charitable purpose. [footnotes omitted]