In an attempt to “do it the right way” many companies, foundations, and individuals add specific conditions to their charitable donations. But adding restrictions to a gift adds unnecessary complexity, reduces the impact of the gift, and in some cases can turn out to eliminate your tax deduction. In other words, it's generally a bad idea.
What do we mean when we say “restriction?” Nothing prevents a donor from adding conditions to their gift. For example, a gift to a symphony orchestra might specify that it can only be used to pay for performances of Alban Berg’s music. Donors might also restrict gifts to exclude certain expenses, such as fundraising or lobbying. Other common restrictions include endowment gifts, in which donors specify that the gift must be invested, and that only a small portion can be spent each year.
Donors typically restrict gifts because:
- they are interested in a particular part of a charity’s mission,
- they are trying to spread their gift out over a long period of time,
- they want to increase the efficiency of the organization,
- there are aspects of a charity’s operations that they find distasteful, or
- they think it’s what you’re supposed to do.
If you put on your accounting hat you can see how quickly this gets messy. If even a small number of donors place arbitrary restrictions on their gifts, the nonprofit’s bookkeeper has to spend a lot of time keeping track of what goes where, and how money can be spent. This adds additional costs to the nonprofit, in both the time spent by the bookkeeper, and during the annual audit. On top of that, the nonprofit spends much more energy trying to figure out how to juggle money to pay for things that aren’t sexy enough. For example, in the entire history of nonprofits, I doubt that anyone has ever asked that their donation be restricted to the sewer bill. But the sewer bill must be paid!
And it’s not only the nonprofit that pays more to deal with restricted gifts. A common requirement of restricted gifts is that the nonprofit provide some kind of report back to the donor, containing proof that the gift was spent according to the terms of the gift agreement. Obviously, someone at the nonprofit needs to write the report, but the donor will probably read it to make sure that the funds were spent properly. If they weren’t, the donor would need to sue the charity to get the funds back. Does that sound like a good use of your time?
If contemplating a lawsuit against a charity isn’t enough to dissuade you, some restrictions can actually cancel the deductibility of a donation. For example, a condition that the gift be returned if something does or doesn’t occur is only deductible if the IRS determines that the condition is “so remote as to be negligible.” Quick: there’s a condition that the money be returned if the charity doesn’t reach a particular fundraising goal. Is that gift deductible?
The most common reasons for restrictions, however, boil down to a single one: you don’t trust that the charity will use the gift the way you want them to. And by making an unrestricted gift, you’ve given up all rights to the money. That really gives you two choices, either reduce the efficiency of the nonprofit by adding a restriction, or just pick a charity that you trust. Never add a restriction because you think it’s forcing the charity to be more efficient — it has the opposite effect.
Restrictions do have a purpose. For example, if you’re giving a very large gift and you want it to be spent over a longer period of time, you might consider an endowment restriction, even though that adds to the reporting (and investment management) expenses of the nonprofit. But there are other ways to achieve the same thing without adding to the nonprofit’s overhead. You could move the money into a foundation or donor advised fund (to get the deduction immediately) and then instruct that gifts be made to the charity annually. That also gives you the freedom to stop making gifts if you don’t like the charity’s future direction.
If you absolutely must add restrictions, be sure to use a well-crafted gift agreement, preferably drafted with the advice of a lawyer. A gift agreement is a legally enforceable contract, so it should be treated with care. If you’re not willing to spend the money on an attorney, make the gift without restrictions. And if that makes you uncomfortable, just pick another charity.