What are material restrictions?

A "material restriction" is any restriction or condition that prevents a community foundation from "freely and effectively employing the transferred asset" as it carries out its charitable purpose. Of course, donors impose restrictions on gifts to community foundations all the time. Clearly, not all restrictions are material restrictions. Generally, so long as a restriction is imposed at the time of the gift and does not limit the community foundation's ongoing ability to "freely and effectively" employ the transferred assets, the restriction will not pose a problem. To clarify, the regulations specifically identify a number of restrictions that are permissible and a number that are not.

Examples of restrictions that are allowed to be imposed at the time of the gift include allowing the donor to: designate a beneficiary, restrict the purpose of the fund, name the fund, restrict distributions to "income only," and require the community foundation to ratian the assets when doing so is important to a charitable purpose. The regulations also allow a donor to retain the right to offer advice with respect to distributions.

Specific examples of conditions that are material restrictions include allowing the donor to: reserve the right (either directly or indirectly) to designate the beneficiary of a fund after the gift is made, designate the timing of distributions (other than in the gift agreement), require an irrevocable relationship with a financial adviser, or require the foundation to retain an investment. Other restrictions, though not automatically "material," may still be problematic if, considering the facts and circumstances, the restriction prevents the community foundation from exercising ultimate control over the assets received.

The mere fact that a donor retains the right later to designate a beneficiary or control the timing of distributions is, by itself, enough to be considered a material restriction. This is true even if the donor never actually exercises that right. Accordingly, a fund agreement that specifically grants the donor the ability to change the fund agreement from time to time would be a material restriction. Such a broad right to amend, unless otherwise limited, would necessarily include the right to change the fund to designate beneficiaries or control the timing of distributions and would be a material restriction.