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Q&A: Restricted Funds

Legal Counsel for Philanthropy and the Nonprofit Sector

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Q&A: Restricted Funds

  1. As the new financial officer of a nursing home, I discovered a trust on the books that hasn't been used for some time. The trust was given by will 65 years ago for the purpose of building an annex "for indigent men and women of good moral character." We don't need an annex, and the trust fund by itself isn't large enough to pay for one anyway. Can we use the fund for other more pressing needs?
  2. Last year, to renovate part of our facility, we received a $25,000 capital grant from a private foundation. It turns out we put a hold on the renovation work and (regrettably) ended up using the money for general operating. Are we legally required to pay back the grant since we didn't use it for the originally stated purpose?

  1. As the new financial officer of a nursing home, I discovered a trust on the books that hasn't been used for some time. The trust was given by will 65 years ago for the purpose of building an annex "for indigent men and women of good moral character." We don't need an annex, and the trust fund by itself isn't large enough to pay for one anyway. Can we use the fund for other more pressing needs?

    One of the finer features of our legal system is a doctrine called Cy Pres. It allows probate courts to rewrite the terms of charitable trusts that have become impossible to fulfill. The term Cy Pres , usually pronounced "sy pray", is French for "as near as." The trust must be used for purposes as near as possible to the outmoded use.

    Consider a typical Cy Pres scenario: A charitable trust was created last century to provide a drinking trough for horses on a public common. Unused, the fund accumulated for 100 years, growing 900 percent. Recently the terms of the trust were updated to build and maintain a swimming pool for inner city youth.

    Commonly, hospitals, municipalities, and other long-established organizations hold funds for health problems, populations, and social conditions that no longer exist.

    In your case, a starting point might be to ask, what can we do today to address the problem the original trust sought to correct? Other nursing and rest homes have received court permission to use similarly-worded trusts as endowments for such current needs as home care, respite care, and emergency medical care for low-income elderly.

    The Cy Pres process itself, although involving the court system, need not be laborious or expensive. The Complaint to the court should succinctly convey the factual background and reasons for the proposed change. In most states the Attorney General, representing the public, is named as defendant. If you can clearly show the original purpose is impossible to fulfill, and that you are complying with the intent of the donor, then you shouldn't have a problem obtaining the Attorney General's assent.

  2. Last year, to renovate part of our facility, we received a $25,000 capital grant from a private foundation. It turns out we put a hold on the renovation work and (regrettably) ended up using the money for general operating. Are we legally required to pay back the grant since we didn't use it for the originally stated purpose?

    Strictly speaking, you are legally required to refund the grant money. In accepting it, you essentially entered into a contract with the foundation. Your obligation under the contract is to spend the money for the purposes stated in your grant application. Therefore, the foundation would likely prevail if it sought to recover the money. As a practical matter, the foundation may be reluctant to expend time and money to sue one of its grantees. Even so, you would be well advised to make every effort to refund the grant or to work out a compromise satisfactory to the foundation. Perhaps more important than whether you keep this particular grant is your organization's long-term relationship with foundations. If you jeopardize your credibility or standing in the grantmaking community, you may harm your organization's ability to secure funding in the future.