Endowments, Endowments and Foundations, Fiduciary Advisor, Foundations, Nonprofits, Selecting an Endowment or Foundation Investment Advisor, Selecting an Investment Advisor
Endowments & Foundations – Restricted vs. Unrestricted Gifts
The Wall Street Journal recently reported that nearly 200 private colleges borrowed from restricted endowments in 2025, up from 131 in 2021, and most of the money went to everyday expenses. The institutions now explaining themselves to regulators shared one assumption: that there was a third way to free up a restricted gift.
What follows begins with the premise that matters most, honoring donor intent, and why the real work is making sure you never have to ask a donor to release anything. It sorts out the three categories boards routinely confuse, and which one of them a board can lift by its own vote. It covers the language that belongs in a gift agreement before the money arrives, the paths UPMIFA actually allows once a restriction exists, and who owns what across the board, its committees, staff, the outside advisor, and counsel. It ends with the controls that surface a problem before the external auditor does, and what the cases now in front of state attorneys general say about where the board was sitting while it happened.
There are two moments when an organization can create flexibility in its endowment, and only two. The first is before the gift arrives, by making the case for unrestricted support and drafting gift agreements that can survive changed circumstances. The second is after the fact, by asking the donor to release the restriction in writing or, if the donor has died, going through a court process with notice to the state attorney general. There is no third path, and the institutions currently explaining themselves to regulators are the ones that assumed there was.
One premise sits above everything that follows. The goal is to honor donor intent, not to get out from under it. A restriction is a promise the organization made in exchange for the gift, and keeping it is both a legal duty and the reason the next donor will trust it with the next one. Building flexibility into the terms before the gift arrives is how an institution avoids ever having to ask. Releasing a restriction afterward is a legitimate last resort, conducted in the open with the donor or a court, but it is not a planning technique. The institutions in this article that treated it as one are the cautionary examples, not the models.
What separates organizations that handle both moments well from those that do not is not an investment skill. It is governance: whether the roles are written down, whether anyone independent tests adherence to policy, and whether restricted funds are looked at on a schedule rather than in a crisis. That is especially true for endowments and foundations in the $25MM–$250MM range, where there is rarely an internal investment office to catch a problem early. Getting there starts with a distinction most boards think they already have straight, and often don't.
What is the difference between a restricted and an unrestricted gift?
Three categories matter, and boards regularly confuse the second and third.
Unrestricted gifts. The donor places no limits. The organization spends the money on whatever advances its mission, as the board sees fit.
Donor-restricted funds. The donor specified a purpose: a named scholarship, a professorship, a building, a program. The restriction runs with the money and binds the institution. Only the donor, or a court, can change it.
Board-designated funds, sometimes called quasi-endowment. These are unrestricted dollars the board itself chose to treat as endowment. Because the restriction is the board's own, the board can lift it by vote, on the record, in the minutes.
Confirm which is which before you need to know. Organizations discover in a crisis that money they believed was committed is board-designated and available (and, more painfully, the reverse).
How do you encourage unrestricted giving on the front end?
This is the cheapest flexibility an organization will ever buy, and it is mostly a matter of asking.
Make the case explicitly. Unrestricted support is what lets an institution absorb a bad year without touching anything it promised to someone else. Donors are rarely told this. Framed as stewardship rather than convenience (the most useful gift is one we can put where the need actually is), it is a persuasive ask, and it belongs in the board's fundraising conversation rather than only the development office's.
Adopt a gift acceptance policy and use it. The policy should state what restrictions the organization will accept, what minimum size justifies a separately tracked restricted fund, and who has authority to approve an exception. Small restricted funds carry administrative cost out of all proportion to their value; a stated floor is a legitimate reason to steer a donor toward unrestricted support or into a pooled fund.
Draft agreements that can flex. When a donor does want to restrict (and many will, for good reasons), the agreement can still be written to survive a changed world:
- Broad purpose statements rather than narrow ones ("student financial aid" rather than a single named major).
- Successor-purpose language naming what happens if the original program ends.
- Explicit variance authority letting the board redirect to a related purpose if the stated one becomes impracticable.
Clear documentation of older gifts is often thin or missing. Institutions in trouble have resorted to hiring archivists to reconstruct what decades-old letters actually promised. Fixing the template costs a fraction of that. The same discipline applies to the religious and mission-based screens many institutions carry: a constraint written into an investment policy statement is easier to administer than one buried in an individual gift letter.
How do you release or modify a restriction after the fact?
Through defined channels, never unilaterally. This is the second of the two moments that matter, and it leaves far less room for improvisation than the first. Most states have adopted a version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA), the statute governing how charities manage and spend endowment funds. Specifics vary by state, so confirm details with counsel:
Living donor. The donor may consent in writing to release or modify the restriction. This is the cleanest path and the most common. It is a conversation conducted by someone the donor trusts, not a form letter, and the consent belongs in the fund's permanent file.
Donor deceased or unreachable. Modification generally requires court approval, with notice to the state attorney general, on grounds such as impracticability or impossibility of the original purpose.
Small, old funds. Many states provide a streamlined route for funds below a dollar threshold and past a certain age, typically requiring notice to the attorney general rather than a full court proceeding.
Two things are worth stating plainly to any board. Asking a donor to lift a restriction is legitimate and often successful; several institutions have bought themselves real time that way. And reclassifying a restricted fund internally because the process looked slow is not a variation on that: it is the thing regulators sue over.
Who is responsible for what?
Most failures here are not decisions anyone defends. They are gaps between parties who each assumed someone else was watching. Writing the roles down is the single highest-return governance step available.
| Party | Owns | Where it typically breaks down |
|---|---|---|
| Board of trustees | The investment policy statement, asset allocation, the spending rate, and the gift acceptance policy; any release of a board designation | Approving policy, then never asking whether it was followed |
| Investment committee | Recommending allocation and spending rate; monitoring the portfolio and liquidity against policy | Reviewing performance in detail and flows not at all |
| Finance or audit committee | Fund-level balances and flows; internal controls; engaging and questioning the external auditor | Assuming the audit is a controls review, which it is not |
| Executive leadership and staff | Implementation; maintaining the fund register; escalating exceptions | Solving a cash problem without escalating it |
| External advisor | Managing within policy; reporting adherence, drift, and liquidity | Reporting returns without reporting policy compliance |
| Legal counsel | Interpreting gift instruments; running any release or modification | Consulted after a decision rather than before |
Two clarifications settle most confusion. The board sets the spending rate and the policy; that authority does not migrate to staff or to an outside firm because they are closer to the detail. And no one outside the board, including a well-regarded advisor, can authorize a change to a donor restriction.
This matters most to endowments and foundations in the $25MM–$250MM range. Pools that size are large enough that a single restricted fund can be material to the budget, and small enough that they rarely have a general counsel down the hall or a dedicated endowment accountant, so fund-by-fund detail often lives in a spreadsheet maintained by someone with several other jobs. That is not a criticism of the staff. It is the reason the committee should ask to see the detail rather than assume it is tracked, and a reason choosing the right investment advisor should include asking how a firm reports policy adherence, not only performance.
What checks and balances actually catch a problem?
A committee should be able to answer one question without hesitating: who would notice if the policy were violated, and how soon? If the answer is the external auditor, the answer is too late.
- Segregation of duties. Whoever can move money between funds is not whoever reconciles fund balances.
- Dual authorization for any transfer from a restricted fund or any change to a fund's classification.
- Exception reporting. Any draw above policy, any reclassification, any negative fund balance surfaces automatically rather than on request.
- An independent look at compliance. Where there is no internal audit function, the audit or finance committee can commission a targeted review of restricted-fund adherence.
- A direct question to the external auditor: did you test the classification of restricted funds, and what did you find? Audit reports are frequently vague about where money was drawn from.
- An escalation path that does not run through the person whose decision is in question.
None of these is exotic, and no single one is the point. The point is that the sequence exists in writing before anyone needs it. A board that has to invent a process during a cash crisis will invent a bad one.
What belongs on the fiduciary review agenda?
Inflows and outflows should be a standing item at every fiduciary review, not an annual exercise and not a response to concern. Sound investment governance is mostly the discipline of looking at ordinary things on a schedule.
- Inflows: new gifts by classification, with the governing instrument attached for any new restricted fund.
- Outflows: distributions by fund and purpose, tested against each fund's stated terms.
- Spending rate: the actual percentage drawn, next to what policy allows.
- Liquidity: what could be raised in ninety days without a forced sale. Spending pressure and illiquidity tend to arrive together, so private markets pacing belongs in the same conversation as the operating budget rather than a separate one.
- Exceptions since the last meeting, each with its resolution and the authority relied on.
- Documentation gaps: any fund whose terms are missing or ambiguous, and the plan for it.
Why does this keep happening, and what does it cost?
The pressure is structural. Reporting by The Wall Street Journal in August 2026 estimated that nearly 200 private colleges borrowed from restricted endowments in 2025, up from 131 in 2021, according to Perspective Data Science, which found most of the money went to everyday expenses. Behind that sits a demographic contraction: enrollment is projected to fall about 13% by 2041, per the Western Interstate Commission for Higher Education.
The consequences are not abstract. At one Ohio college, the state attorney general filed a complaint against 14 trustees and officers, alleging improper use of more than $2 million of restricted funds outside donors' intended purposes; the college has since closed, and the defendants have denied breaching their fiduciary duties. Elsewhere in the same reporting, roughly $20 million was reclassified from donor-restricted to unrestricted at one university without prior board authorization, with auditors identifying a material weakness in internal controls.
Note where the board sat in those cases. In most of them it was not the actor; it was the body that did not see what was happening in time. Several states, including Kansas, Kentucky, Georgia and Montana, have recently made it easier for donors themselves to sue over restricted gifts used outside their terms.
Higher education is the sharp end of this, but the mechanism is not unique to campuses. Any mission-driven organization with a long-dated pool, a squeezed operating budget, and a reluctance to shrink is exposed to the same sequence, and protected by the same governance.
Talk with Vistamark
For more information and personalized guidance, please feel free to reach out to Vistamark Investments LLC. You can contact us at 312-895-3001, visit our website at www.vistamarkllc.com, or send us an email to info@vistamarkllc.com.
This material is for informational and educational purposes only and does not constitute legal, tax, or investment advice, or a recommendation of any security or strategy. Statutory requirements governing endowment funds vary by state; consult qualified legal counsel regarding any specific gift instrument, restriction release, or modification. Vistamark Investments LLC is an investment adviser; information about the firm is available in its Form ADV.
