Q: If a church has a restricted fund, such as a building fund, can it borrow from the fund for an unrelated purpose as long as it is made clear that the money will be repaid?
1. State Laws and Criminal Liability
In many states, borrowing from a donor-restricted account is considered theft, even if the church plans to repay the amount with a formal promissory note. Such actions can result in criminal charges against those responsible for approving the loan.
2. Breach of Fiduciary Duty
Borrowing from restricted funds may also constitute a breach of fiduciary duty. Church leaders who approve such actions could face legal consequences, including personal liability for damages.
3. Violations of Deceptive Trade Practices
In some states, using restricted funds for unrelated purposes may violate deceptive trade practices statutes. These laws allow donors or the attorney general to sue for damages, punitive damages, and attorneys’ fees. Such lawsuits can have significant financial and reputational impacts on the church.
Exceptions for Board-Created Restricted Funds
If the restricted account was created by the church board and contains funds transferred from the general fund, the board may have the authority to remove the restriction and transfer the funds back to the general fund. However, this option should be exercised cautiously and transparently to avoid confusion or mistrust among church members and donors.
Why Borrowing from Restricted Funds Is a Bad Idea
Even when legally permissible, borrowing from restricted funds is generally discouraged. It undermines donor trust and can lead to long-term financial instability. Additionally, pledging restricted funds as collateral for a third-party loan is equally problematic and should be avoided.
Best Practices for Managing Restricted Funds
To maintain financial integrity and comply with legal requirements, churches should follow these best practices:
- Understand State Laws: Consult a qualified attorney to ensure compliance with state-specific regulations regarding restricted funds.
- Maintain Transparency: Clearly communicate the purpose and usage of restricted funds to donors and stakeholders.
- Plan for Emergencies: Establish an unrestricted reserve fund for unexpected financial needs, reducing the temptation to use restricted funds inappropriately.
- Seek Expert Advice: Before taking any action involving restricted funds, consult a financial advisor or nonprofit attorney.
For more guidance on managing restricted funds, visit the IRS Charitable Contributions page or consult resources from the Evangelical Council for Financial Accountability.
FAQ: Restricted Funds
- What are restricted funds?
Restricted funds are donations designated by donors for specific purposes, such as building projects or mission programs. - Can a church borrow from restricted funds?
In most states, borrowing from restricted funds is illegal and can lead to criminal or civil penalties. - What are the consequences of misusing restricted funds?
Churches may face legal actions, financial penalties, and damage to their reputation if restricted funds are mismanaged. - How can churches avoid issues with restricted funds?
By understanding legal requirements, maintaining transparency, and consulting experts before making decisions about fund usage.
