Alicia Schatteman wrote:

"We received a large gift in 1996 ($519,000 in cash, home and contents
to turn into a historic house museum).  We already operate one historic
house.  Of this cash, about $300,000 has been spent towards an exterior
restoration project (we provided matching funds for a state grant).  My
problem is now we have the rest still unrestricted as we plan to start
an exterior restoration on the home soon.  The Board left this money
undesignated because we have also dipped into it to cover some
operational costs for the Historical Society.  The donor did not leave
any restrictions when she gave us the money six years ago.  I was told
by another Executive Director that we should designate these funds, or
move them into an endowment because the IRS doesn’t like nonprofits
having undesignated funds.  Does anyone have any similar stories or can
confirm or deny the IRS’ interests with undesignated funds?"



Since no one else has jumped in on this one, and I think it is an
important point to clarify, here are my thoughts on the situation:

I don't think the IRS cares how you do or don't designate your funds, as
long as they are spent to meet your charitable purpose. It sounds to me
like folklore used to convince a board of something that truly is a good
idea, but is often resisted. Lots of boards like to keep such money
unrestricted because it gives them latitude to spend. And also,
probably, latitude to relax in their fundraising efforts.

You actually kind of said it all here:

"The Board left this money undesignated because we have also dipped into
it to cover some operational costs for the Historical Society."


Sadly, many board members tend to overlook the big picture of their
responsibility to the organization and happily spend away wonderful
gifts like that, only to have the organization broke again in a few
years, when it would be so much smarter to use it for generating more
income on an ongoing basis. If you had that money invested at, say, 5%
return, you would double your money in 20 years (and lots more if you
start adding other memorial gifts or bequests to it, or reinvest some of
the income). It seems to me that for a museum, which is supposed to be
going on in perpetuity, it is almost criminal not to have some kind of
capital fund to help assure ongoing income.

Ask the board what they would do if they personally inherited that kind
of money?  Spend it or invest it?  (If they say 'spend it' I'd wonder if
that's the kind of folks you want on a board.)


There is another important point which may make it easier to make the
decision to create a capital 'endowment' fund: that which is designated
can be undesignated if, in the future, there is ever a true emergency as
long as (as you stated) the money had no restrictions on it when given.
Some organizations I've belonged to have two funds, a restricted
endowment (where you put restricted gifts) and an unrestricted
endowment, set up to generate income. It would probably have fairly
strict provisions in the by-laws or policies for what it would take to
unrestrict it to use for some major need.

When you go looking for donations, some people really like the idea of a
restricted fund because they know their gift, however small, will 'go on
giving' and you might get donations that you wouldn't otherwise. It also
is a good way to attract memorial gifts, with the idea that something
given in a person's memory will give in perpetuity, and keep a bit of
the value of their life going on.

Well, that's a lot of 2 cents worth, but I believe strongly in having
endowment or restricted capital funds. (One bequest given to my museum
that started at $75,000 made it to $150,000 in less than 10 years in a
very conservative investment situation. Another, in the boom of the 90's
went from 100K to 350K in about 6 years. So go figure...... )

Lucy Sperlin
Heritage Management
Chico, CA

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