Can a nonprofit charge expenses associated with managing a restricted gift to the gift itself? A sizable amount of the funding received by nonprofit organizations consists of restricted gifts meant for specific programs or projects.
Many nonprofits use unrestricted operating revenue to cover the cost of managing their restricted funds, leaving the organization with insufficient unrestricted cash. These management costs, however, can often be met by the restricted fund itself.
Designation of a Restricted Fund
A restricted charitable gift is a donation of a financial or material asset in which the donor includes restrictions on how the assets will be used or managed. Donors have complete discretion over whether to restrict their gift.
The donor can make such a designation in a letter, e-mail, gift agreement, or even as a notation on a check. When soliciting donations by direct mail or e-mail, nonprofits can prevent confusion by giving donors a choice of designation. For instance, they may include a provision specifying the purpose of the donation on the donation form or in the gift acknowledgment.
Nonprofits can also solicit unrestricted funds. Receiving unrestricted donations provides them with the freedom to allocate funds to the initiatives where they are needed. An exception to this general freedom exists when a nonprofit solicits funds for a particular objective, such as a scholarship or building fund. In such instances, the solicitation itself creates the restriction.
In most cases, nonprofits can charge expenses to their restricted gifts. Under the Uniform Prudent Management of Institutional Funds Act (UPMIFA), a version of which has been adopted in nearly every state, the administrative expenses associated with administering restricted funds may be paid out of the restricted fund itself. UPMIFA allows for “costs that are appropriate and reasonable in relation to the assets…”
For example, Arizona’s version of UPMIFA provides that “[i]n managing and investing an institutional fund, an institution may incur only costs that are appropriate and reasonable in relation to the assets, the purposes of the institution and the skills available to the institution and shall make reasonable efforts to verify facts relevant to the management and investment of the fund.” 
Therefore, unless the gift instrument includes terms that specifically state the organization cannot spend the fund on administrative or management expenses, then the state’s version of UPMIFA will control.
The question then becomes, what constitutes a cost that is “appropriate and reasonable” in relation to administering the restricted assets?
Administrative expenses are not limited to investment fund manager fees but also may include any reasonable cost of administering the fund, including an allocation of salary and overhead if such salary or overhead was used to administer the restricted fund. Other administrative expenses that are often ignored include accountant fees, legal fees, payroll fees, subscriptions and memberships, postage, shipping, computer supplies, meals, travel, training courses, and insurance.
In addition, because restricted funds require direct management, any payment made to investment institutions, accountants, or lawyers for the procurement of advice and management related to the fund will constitute an allowable administrative expense.
Some indirect administrative overhead costs may not initially appear to be permissible administrative expenses. For instance, to reflect the costs of generating funds for their endowments, many universities will allocate a portion of their fundraising expenditures to the endowment itself.
There are many ways to establish the allowable administrative costs that a restricted fund may cover. One approach is to charge any direct expense that relates solely to the restricted fund to the fund itself. Indirect expenses that apply to multiple funds may be allocated among the various funds in any reasonable manner.
If expenditures relating to the administration of a restricted fund have already been paid for by general operating funds, the restricted fund may be used to reimburse the general fund. Finally, nonprofits should always retain any supporting documentation that supports the allocation of costs against restricted funds.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.
 A.R.S. 10-11802(C).