Church Money, Donations & Financial Controls

Designated and Restricted Gifts: What You Can and Cannot Do

Published 2026-08-25 · Church Money, Donations & Financial Controls

Short answer: a restricted donation must be used for the purpose the donor stated. The church can't quietly spend it on something else, even something urgent. A restriction the *board* places on its own funds is a different animal, and the board can lift it. A gift earmarked for a named individual is generally not a deductible contribution to the church at all, no matter what the envelope says.

The boiler fails in February. The treasurer knows there's $38,000 in the account, and also knows that $30,000 of it came in three years ago marked "for the new sanctuary," a building that hasn't been designed, let alone started.

Nobody in that room wants to do anything dishonest. They just want to know whether the money is theirs to use. That's the whole question this post answers, and the answer turns on who put the restriction there. The rules for receipting any church donation sit underneath all of it.

Restricted or designated? The difference decides everything

Two words that get used interchangeably in church meetings mean two very different things.

A donor restriction is imposed by the giver at the time of the gift and accepted by the church. It's a condition of the transfer. Once the church takes the money knowing the condition, the church is bound to it. The board can't vote it away, because the board isn't the party who imposed it.

A board designation is the church setting aside its own unrestricted money for a purpose it has chosen: a building fund, a reserve, a vehicle replacement line. That's an internal management decision. The same board that made it can unmake it with a vote and a minute.

The same $30,000 sitting in the same account has completely different rules attached depending on which of those two it is. And the answer is almost never in anyone's memory. It's in whether the church solicited the money for a stated purpose, and what the donor was told.

Write it down at the moment of the gift, or you'll be arguing about it years later with no evidence.

What the church takes on when it accepts a restriction

Accepting a restricted gift is accepting an obligation. Three things follow.

You must use the money for the purpose. Spending it on something else isn't a bookkeeping matter. It's using someone's property contrary to the terms on which you received it, and it's the kind of thing that ends with a state charity regulator or an angry family involved.

You must be able to show that you did. That means the funds are tracked separately in the accounting. Not necessarily a separate bank account, but a separate fund line that can be reported on. If your books can't answer "how much of the building fund is left," they can't evidence compliance either.

You must report honestly on it. A church that keeps taking building fund gifts while the project is dormant should be telling donors that.

The corresponding freedom is real: you can decline. A church isn't obliged to accept every gift, and a restriction the church can't honor, or doesn't want to be bound by for the next twenty years, is a gift to say no to politely. That decision is much easier when a written gift acceptance policy already says who decides and on what basis.

The earmarking problem: gifts aimed at a person

This is the error with the sharpest consequences, and it's extremely common because it always comes from kindness.

A member writes a check to the church and puts "for the Alvarez family's medical bills" or "for Pastor Dan's sabbatical" or "for Sarah's mission trip" on the memo line. The church passes the money to that person and issues a contribution receipt.

The problem: a payment routed through a charity to a specific named individual chosen by the donor is generally a gift to that person, not a deductible contribution to the church (IRS Publication 526, Charitable Contributions). The church has acted as a conduit. The receipt is then wrong, and the donor is relying on it.

What makes the difference is discretion and control. A gift is a contribution to the church where the church, not the donor, decides who receives assistance, applying its own criteria, and the donor's preference is genuinely a suggestion the church is free to disregard (IRC §170, Charitable contributions). If the church couldn't redirect the money without the donor objecting that the terms were broken, it was never really the church's money.

Practical consequences:

• Benevolence. Set up a benevolence fund the church controls, with written criteria and an approval process. Accept gifts to *the fund*, not to a family. Tell donors kindly and in advance that you can't honor a named designation, because saying it afterwards feels like a betrayal. Church benevolence without losing your exemption walks through the structure.
• Mission trips. A gift "for my daughter's trip" has the same shape. Churches handle this by funding the trip, not the traveler: the church controls the funds, sets who goes and what's covered, and states clearly that gifts support the trip and any surplus stays with the missions program.
• Staff gifts. Money collected for an employee is usually compensation, not a contribution, and there are payroll consequences (IRS Publication 15 (Circular E), Employer's Tax Guide). This one is worth getting right before Christmas, not after.
• Scholarships. Same principle: objective criteria, a committee the donor doesn't sit on, and no donor selection of the recipient. Letting a donor pick the beneficiary is also how a church walks into a private benefit question (IRS, Inurement / private benefit).

None of this means a donor can't express a wish. It means the church has to actually hold the discretion, and the donor has to know it.

When the purpose is finished, impossible, or overtaken

Restricted funds outlive the plans they were raised for. Three situations recur.

The purpose is complete and money is left over. If your solicitation said what happens to a surplus, along the lines of "any funds raised beyond the project will be used for general ministry," you follow that. If it said nothing, you're holding money for a purpose that no longer exists.

The purpose has become impossible. The land deal fell through. The program closed. The overseas partner ceased to exist.

The purpose is technically alive but dormant, which is the boiler case. The building fund isn't impossible. It's just not happening this decade.

The routes out, in order of preference:

1. The written terms. If the gift agreement or the appeal wording addresses surplus or failure, that governs. This is why the wording of an appeal matters as much as the gift agreement.
2. Ask the donor. A living donor can release or modify a restriction. Get it in writing. An email confirming the change is fine. This is by far the easiest route, and churches skip it because they're embarrassed to ask.
3. Where the donor can't be found or has died, releasing a restriction may require a formal process, and in some jurisdictions that means a court or the state's charity regulator. Small older funds are sometimes releasable by board action under state law; larger or newer ones frequently are not.

Route three is where you stop and get advice. A board that votes to repurpose a substantial restricted fund on its own authority, with no donor release and no legal basis, has created a real problem for itself. If the amount is significant or the donors are unreachable, talk to a lawyer before the money moves, not after.

A worked example

A church runs a building appeal. The letter says: *gifts to the building fund will be used for the construction of a new sanctuary; if the project does not proceed, the board may apply the funds to other capital needs of the church.*

Over two years it raises $30,000 from about forty donors. The project stalls. The boiler dies and the replacement is $12,000.

Because the appeal wording included the fallback, the board can act. It minutes a resolution applying $12,000 of building fund money to the boiler as a capital need, notes the authority in the appeal wording, and writes to donors telling them what was done and why.

Now change one fact. The appeal said only "for the new sanctuary." No fallback. Same boiler.

The board's options are narrower: contact donors and ask for written releases, use unrestricted funds or a reserve for the boiler, or seek a legal route for the funds it can't get released. Forty small donors is tedious but achievable, and most will say yes. The lesson isn't about the boiler. It's that one sentence in the appeal letter, written before any money arrived, was worth more than every meeting held afterwards.

How churches get this wrong

No record of what the donor was told. The appeal letter, the bulletin insert and the envelope wording *are* the terms. Keep them.

Restricted money in one undifferentiated bank balance. Pooling cash isn't illegal, but if the fund accounting doesn't track it, the church can't tell whether it has spent it.

Borrowing from a restricted fund "temporarily." This is how good churches drift into a serious problem. If it must happen, it needs a board decision, a written repayment plan, and honesty with donors. It's still a bad idea.

Accepting any restriction offered. A gift restricted to a ministry you are closing, or with conditions running for decades, may cost more than it gives. Decline gracefully.

Letting donors pick individual recipients. Covered above. The kindest version is the clearest one, stated up front.

Treating a board designation as untouchable. The opposite error. Boards sometimes refuse to use their own reserve because someone called it a fund. If the board designated it, the board can redirect it, with a minute.

Silence. Donors who hear nothing about a fund for three years assume the worst. An annual line in the report costs nothing.

What to do this quarter

1. List every fund and mark each one donor-restricted or board-designated. Where nobody knows, look for the appeal wording. Where nothing exists, note that honestly and set the church's position going forward.
2. Adopt a gift acceptance policy covering who may accept a restricted gift, what the church won't accept, and how non-cash gifts of cars, stock and property are handled.
3. Fix your appeal wording. Add the surplus and fallback sentence to every future appeal, envelope and giving page.
4. Set the benevolence and missions rules so gifts go to the fund, not the person, and say so where donors will read it.
5. Report annually on restricted fund balances to the board, and in summary to the congregation.
6. Adopt the receipting language to match. The sentence every contribution statement needs applies to restricted gifts exactly as it does to unrestricted ones.

Common questions

Can a donor take a restricted gift back?

Generally not. A completed gift belongs to the church, subject to the restriction. What a donor can do is release or vary the restriction, which is usually what they actually want when they call.

Do we have to keep restricted funds in a separate bank account?

No. Separate *fund accounting* is what matters, because you must be able to report the balance and the activity. Separate bank accounts are a choice, and for large capital projects many churches find them simpler.

Someone gave "for the youth ministry" and we have wound the youth ministry down. Now what?

Ask the donor first; a living donor can release the restriction in a sentence. If that isn't possible, look at the wording of the original appeal, and if there's nothing there and the amount is meaningful, get advice before repurposing it.

Can we receipt a gift that is restricted?

Yes. A restriction doesn't affect deductibility as long as the gift is to the church for a church purpose and the church holds control (IRS Publication 1771, Charitable Contributions). It's *earmarking to an individual* that breaks it, not restriction as such.

Our pastor was given a large cash gift by the congregation at Christmas. Is that a donation?

Almost certainly not a deductible contribution to the church, and quite possibly taxable compensation to the pastor. Handle it through payroll rather than the offering, and decide the treatment before the collection, not after.

The practical wrap

Restricted gifts aren't a trap. They're a promise, and promises are manageable when they're written down at the moment they're made.

Say what the money is for and what happens if the purpose fails. Track the fund so you can prove you kept your word. Keep discretion over who receives help. And when a restriction has to change and the donor isn't there to release it, that's the moment to call a lawyer rather than take a vote.

For the wider set of financial controls a board should have in place, start with the governance and finance documents most churches need first.

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Decide before the gift arrives, not after. The Donation Receipt & Gift Acceptance Kit is the donor acknowledgment letters and the gift-acceptance policy, written to the substantiation rules, including the language that keeps discretion with the church and tells donors, kindly and in advance, what your church can and cannot accept. $49, instant download.

*Faith Docs provides self-help document templates, not legal advice. We are not a law firm. For representation, consult a licensed attorney.*