The Attraction of Restricted Giving, and What Can Go Wrong

Restricted giving is very popular and its use is increasing. It is increasing because it is attractive to both the donor and the charitable institutions. A good way to understand this is with a little story.

Say we have a little girl, Sally, asking her Dad, her resource provider, for a dollar. She doesn’t have a specific reason for asking for the money, and Dad is concerned that she might spend it on candy or something else he does not think is good for her. So he refuses her request.

A little while later, Sally take another approach, asking her Dad for $2 to buy ice cream.

Notice that Sally has increase the size of her gift request and that her resource provider has quickly opened his wallet and happily agreed to the request. The recipient organization, Sally, has found that if she requests funding for a specific purpose, she increases her chances of success and, in many instances, she may also increase the amount that the resource provider is willing to invest.  Sally has requested and received a restricted gift.  

But Wait! While an unrestricted gift may be used for any purpose within the organization’s exempt mission, a restricted gift comes with strings attached. The restricted gift establishes an obligation on the part of Sally: She has to buy ice cream. It also solidifies an expectation on the part of her Dad, the resource provider: He expects her to buy ice cream.   

Now let’s look at various potential actions for Sally:

 


Action

A

Sally's Spending for Ice Cream

$1.95

B

$  .95

C

$1.50

D

$2.00

E

Purchased 4 ice cream cups over the next two months for $ .50 each.

Action D is probably exactly what the resource provider expected and both he and Sally are satisfied with the outcome of his “donation”. Action A is pretty close and the resource provider would probably be very pleased if Sally offered to give Dad back the 5 cents change.  Action C is not as close as Action A or D and Dad, the resource provider, having over funded the ice cream buying activity by 25 percent, is probably more concerned about the excess funding and may be expecting a refund of the over funded amount. Action B is that much worse than Action C and the 52.5 percent over funding request actually has Dad a bit upset with Sally.  

Action E is a situation in which it is very difficult to figure out Dad’s potential reaction. Did the resource provided think that he was funding small ice cream purchases over an extended period of time or did he think the request was for an ice cream sundae, a special treat? This is obviously a situation in which Sally failed to adequately communicate with her resource provider. If Dad is upset with how the funding was spent, Sally has no one to blame but herself.

What have we learned so far? Restricted gifts may be easier to obtain and may be larger than unrestricted gifts. However, the recipient organization obtains an obligation along with the gift and the donor has a greater involvement and set of expectations in regard to how the recipient has used the funding. The amount of communication between donor and recipient is greater and more specific with restricted giving and the responsibility for full communication and transparency is with the recipient organization. Donors, however, who make restricted gifts because the restriction is important to them should also take responsibility for achieving a complete and thorough understanding between the two parties.

The communications between the donor and the recipient organization, although beginning verbally, should be reduced to writing prior to the execution of the restricted gift. This written document is called the “gift instrument.” It is essentially a contract between the two parties: “I will give you this much funding, if you do this action.” Both parties have a contractual obligation to the other.  

Although the written document—the gift instrument—appears to be something started by the donor, (“Here is $2 to purchase ice cream”) it is possible that the gift instrument is begun by the institution. If Sally hadn’t verbally asked her Dad for $2 for ice cream, but instead sent him a note or text message saying “Can I have $2 for ice cream?” that note would become the gift instrument and the contract would be created when her Dad responded to it by giving her the $2. He doesn’t need to write her a note indicating that his $2 of funding is for ice cream. Her written request is the gift instrument. Merely responding to her solicitation for restricted funding establishes the restricted gift.

That is enough to absorb for now. Send me your questions or comments as the complications and complexity will only build from here on.  fam@fmonti.com