Church officials are often presented with the question of how to properly use designated funds. For example, if contributions are designated for the building fund, can they be used for anything other than construction or other building costs?
First, it is important to remember that the church leadership must have final control over the gift or such is not a charitable contribution. If the donor gives certain funds to the church and restricts the use of the funds in such a way as to be only using the church as a “pass through,” then the donor is not entitled to a charitable contribution receipt from the church. This would occur, for example, if a donor gave money to create a scholarship fund and then specifically stated that the only recipients of the scholarships were to be people that the donor designated. In that situation, the church is only being used as a “pass through.”
However, when the church creates a designated account, such as a building fund, and gifts are made to that fund, the donor is entitled to credit from the church for a charitable contribution. The question then arises as to whether the church can “divert” funds out of that church-established designated account for other church-related purposes.
Designated funds can technically only be used for what they were designated for by the donor ultimately. However, the church may temporarily use those funds for cash flow matters but they must again be ultimately available for the designated purpose.
Oftentimes designated funds are lumped with all church resources but separated on the church books as designated funds. While it may look like there is money in the bank, actually those funds are designated. This often leads to those funds being used to pay the electric bill, etc. To temporarily “borrow” against these funds is not prohibited as long as the designated funds are replaced and are available when needed for the designated purpose. For example, it would make little sense for a church to have to borrow money for a week or two to pay bills when the church was holding large amounts in a building fund that will not be needed for months.
However, if such “borrowing” does occur, it is absolutely necessary for all designated funds to be replaced and available when needed. On the other hand, if the designated project does not materialize, for example the church decides not to build a new building, the case law tends to indicate that the church leadership can “re-designate” funds in a designated account for other church purposes. In the event this should happen, it is recommended that instead of the church leadership taking unilateral action to re-designate the funds that they should seek permission from the donors to take such action. Keeping donors satisfied is paramount for long-term giving possibilities.