Designated gifts to a church can be a source of great support to church ministries, but can also cause conflict and confusion if the gifts are not properly handled and administered. Churches should be sure they adopt policies that are consistent with tax law and IRS regulations — and then apply those policies uniformly with all gifts.
One key principle of designated gifts is often misunderstood: For any gift to be considered a charitable contribution, the church must maintain what is called “administrative control” over the funds. This means the church must make the decisions on how the money is spent, regardless of the designations attached to it. The only exception is when the donor notifies the church the gift is conditioned upon a certain action of the church. A recent case highlighted this principle when a famous country music star gave significant dollars to a hospital, on the condition that the new wing of the hospital be named for his mother. The court ruled that the gift had to be returned because the condition was not met in a reasonable time frame.
More often, churches create a designated fund for some purpose and then encourage donations to the fund. Many times, however, the purpose of the designated fund must be changed because the needs of the church change. For example, a church creates a designated fund to build a new building. After a few years, the building project is determined to not be feasible. In this case, it is perfectly legal for the church – not the pastor or finance committee – to decide to use those funds for some other aspect of the church’s mission. Obviously, a church that does this too often will suffer a credibility issue with donors to future projects.
Here are three steps that a church can take to ensure that they handle designated giving appropriately:
1. Develop a defined policy on how designated funds are created by the church. It should define how the decision is made to create a designated fund and the basic information that should be included in the minutes of the meeting when the fund is created. The policy also should clearly state that the purpose of any designated fund may be changed by a vote of the congregation.
2. Develop a defined policy that describes the process for accepting or rejecting designated funds that come from a donor, with and without conditions. A key part of this policy will be to give the finance committee or other body the authority to reject a designated gift the church does not feel is consistent with its mission and vision. Sometimes these are obvious because they are inconsistent with charitable contribution rules, but often they are for valid purposes that may not lead in a direction the church is willing to take.
3. Provide training and information to the church treasurer or church financial secretary on how to correctly handle gifts that are given to the church. People in these positions need to understand church policy, but also what gifts to a church are truly tax deductible.
William F. Maxwell is Administrative Director for the Tennessee Baptist Convention. To connect with William about these and other church administration issues, email him at firstname.lastname@example.org.
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