When is it appropriate to divert designated funds for general fund uses?
1. Check the designation and the source of the restriction. If the funds are designated by your nonprofit’s board of directors for a specific purpose, your board can usually change the designation by appropriate formal action.
2. If the funds are restricted by language in the donor’s instrument of gift, go back and check the specific language to see what it will permit. If the donor can be reached and is amenable, get the language in the instrument of gift or grant agreement revised to free up the uses of the funds.
3. Are the restricted funds endowments that are impracticable, old (more than 20 years old), and of modest size (less than $50,000 in Maryland, for example)? If yes, then your nonprofit’s board of directors generally can loosen the restriction effective 60 days after notice and presuming no objection from your state’s attorney general.
4. Regardless of the size or age of the endowment fund, has the restriction contained in the gift instrument become obsolete, inappropriate, or impracticable? Is there another charitable use generally consistent with the donor’s intent? If yes, you may be able to petition a court, with notice to your state’s attorney general, to modify the restriction on the endowment fund. This process is slow and expensive.
The preceding question was submitted through GuideStar’s social networks, and the answer was provided by Davis V.R. Sherman, Esq., Partner, Venable LLP, Baltimore, MD (contact here.) Veneble LLP is an AmLaw 100 firm that practices in all areas of corporate and business law from offices in Maryland, California, New York, Washington DC, and Virginia.Davis Sherman concentrates his practice in advising hospitals, colleges, and other tax-exempt corporations and underwriters in the arranging of tax-exempt bond financing for capital projects. He also represents clients in project financings and corporate mergers and acquisitions. As a regular participant in tax-exempt revenue bond financings in a variety of settings, Mr. Sherman efficiently manages the complex interface between the multiple players in a major capital project financing.