In this article, we rely on advanced legal and analytical treatment of the topic of restricted gifts presented by legal researcher Linda J. Rosenthal, JD in her article published in For Purpose Law Group on December 4, 2025, titled: Restricted Gifts: A Primer. We have aligned in "The Third Bank | Encyclopedia of Knowledge Enrichment for the Non-Profit Sector" the key points mentioned with the context of the non-profit sector in the Kingdom of Saudi Arabia while maintaining the literary rights of the author and the original source, and providing an interpretative reading closer to the reality of local associations and charitable organizations.

At the end of each year, many non-profit organizations enter a frantic race against time and budgets. A few weeks can represent more than a third of the annual revenues, and there is immense pressure to salvage as much as possible from plans, promises, and carefully prepared budgets. In such an atmosphere, any significant gift that carries swift promises appears to be an irresistible lifeline.

But behind this allure lies a special kind of gift that deserves to be carefully considered before we reach out: restricted gifts.

First: What is a restricted gift really?

At the accounting and legal levels, not all donations are alike. A restricted gift is a donation that includes clear or implied conditions set by the donor regarding:

1. The purpose for which the funds are to be used

2. Or how they are invested

3. Or the timing and amount of spending from it

For example, the donor might insist that their gift be spent on a specific educational program, in a particular city, or within a certain time frame. They may request that the gift be converted into an endowment fund where the principal is not to be spent, but only the interest is utilized.

Sometimes, the donor does not write their condition in a separate letter, but the charitable organization itself creates it when it launches a campaign titled: "Every riyal you donate today will go toward purchasing dialysis machines." From that moment, the organization becomes obligated—ethically and legally—to direct these funds to this specific purpose, even if the donor did not write the word "restricted" anywhere.

These gifts are similar to a "non-refundable gift" but are subject to a condition, or a set of conditions, that can be difficult to reverse later without complications.

Second: Why do these gifts attract both parties?

The allure of this type of gift comes not only from its financial value but also from the nature of the relationship it creates between the donor and the receiving organization.

From the donor's perspective: the restricted gift gives them a greater sense of control, and that their money will not dissolve in an obscure "public fund," but will go to a project or program they can see with their own eyes. This sense alleviates their anxiety and increases their willingness to give, especially with major donors, corporate grantmakers, or families wanting to tie their name to a specific program.

From the non-profit organization's perspective: in times of financial pressure and "cash shortages," restricted gifts seem like an attractive solution. A donor offers generous funding for a new project, an expansion of a successful program, or the building of a new structure or center. In the brief moment of negotiation over the terms, the logic may prevail: "Let's accept today, and work out the details later."

Here begins the thin thread between a "lifeline" and a "long-term burden."

Third: Where do the real risks hide?

The problem is not in the idea of the restricted gift itself, but in how it is managed. There are three main minefields:

1. Accounting complexities that exceed the capabilities of many organizations

Managing restricted funds requires:

1. Accounting systems capable of separating restricted from unrestricted funds

2. Precise tracking of every riyal: when it came in, how it was spent, and on what item

3. Periodic reports showing the donor and regulatory bodies the organization's compliance with the conditions

Many organizations—especially small and medium-sized ones—do not yet possess this accounting maturity. Accepting conditional gifts in such cases adds a layer of complexity that the systems and the team cannot bear.

2. Legal obligations that may persist despite changing circumstances

The donor's intent is not merely a nice recommendation; in many contexts, it is treated as a binding obligation. If circumstances change drastically—laws are canceled, national priorities shift, the organization merges with another, or the program cannot be implemented for any objective reason—the organization, in principle, remains bound by the original donor's intent unless the agreement is renegotiated or a regulatory or judicial permission is obtained to change the spending direction.

In the Saudi context, with regulatory bodies keen on transparency and protecting the funds of endowers and donors, tampering or laxity in this point poses a real risk at the reputational level, and perhaps at the personal responsibility level for the management of the organization and its board of directors.

3. A reputation that may silently suffer... and then explode

Violating the conditions of the restricted gift does not only harm the relationship with the donor themselves, but it can quickly extend to broader circles:

1. Talks in business circles

2. Whispers among donors

3. Or negative media coverage that places the organization in the "unreliable" category

Hundreds of organizations compete for the trust of a limited number of major donors, but a single bad tale may be enough to close many doors for years.

Fourth: How do non-profit organizations smartly deal with restricted gifts?

The question is not: "Should we accept or reject restricted gifts?" The more important question is: "How do we accept them in a conscious way that makes them a lever for impact, not an additional burden?"

The prudent path can be summarized in three critical moments:

1. Before acceptance: Assessing capacity and readiness

Before signing any conditional gift agreement, the organization should ask itself:

- Do we have an accounting system capable of separating and tracking these funds? - Do we have a management and financial team that understands the nature of the restrictions and can comply with them? - Are the donor's conditions realistic and aligned with our strategic plans, or will they drag us into side projects that exhaust us?

If the answers are not reassuring, the initial step is not to immediately reject but to negotiate redesigning the gift in a more flexible way, or to postpone acceptance until the necessary readiness is established.

2. During contracting: Clarity that leaves no room for interpretation

Ambiguity in text is the primary enemy of restricted gifts. The agreement or letter of conditional donation should include:

- A precise definition of the purpose the funds will be spent on - Clear time limits for implementation or spending - An agreed mechanism to address changing circumstances (the possibility of redirection, or refunding part of the amount, or transferring it to another fund with the donor's approval) - A commitment from both parties to periodic reports and methods of communication

The clearer the text, the easier the management of the gift, and the less likelihood of misunderstanding.

3. After receipt: Governance and follow-up that do not rely solely on good intentions

A restricted gift is not a "financial transfer" that ends when it enters the bank account; it is an ongoing governance project. This means:

- Including it as a fixed item in the executive management reports to the board of directors - Providing customized reports for the donor showing how the funds were used and where the projects have reached - Periodic reviews by an external auditor (or an internal audit committee) to ensure compliance with the restrictions

The most important message here: good intentions are not enough, without systems, evidence, and documentation.

Fifth: What does this mean for boards of directors and executive leaders?

In an environment witnessing rapid growth in the size of the non-profit sector and increasing complexity in financial tools (endowments, social investment funds, conditional grants, partnerships with major companies), boards of directors need to change their perspective on restricted gifts:

Not every large gift is a "once-in-a-lifetime opportunity"

And not every restriction is an "absolute evil" that must be avoided

A restricted gift can be a powerful tool for directing resources toward strategic priorities, building a deep relationship with a strategic donor, and developing a more sustainable funding model. However, it can also become a suffocating constraint that traps the organization in projects it cannot fund operationally or exposes it to responsibilities it cannot bear.

The distinction between the two cases does not come from the "size of the check" but from the quality of governance: from the board's courage to ask difficult questions and the executive management's maturity in assessing the gift's impact in the medium and long term, not just over one month or one report.

Toward a More Mature Culture in Handling Donor Funds

The story of restricted gifts is not a tale of "legal tricks" or a "accounting term," but part of a broader discussion on how to respect donor funds and maximize their impact.

The organization that knows when to say "yes" and when to say "let's redesign this gift in a better way" is an organization that treats itself and the donor with respect. And the sector that matures in managing this type of donation moves one step closer to building sustainable trust with the community, donors, and regulatory bodies, away from the quick-fix solutions that seem shiny in December... and reveal their true cost in February.

This article is inspired by and partially built on the article: Restricted Gifts: A Primer – For Purpose Law Group.