Q&A #87 – Who controls the remaining funds when fiscal sponsorship is terminated?

Question: I lead a team that has been running a charitable project with the help of a fiscal sponsor. This relationship is not working out as we had hoped, so we would like to find a new fiscal sponsor or perhaps obtain 501(c)(3) status directly. However, we are concerned that that the fiscal sponsor might not distribute the remaining funds to us if we terminate the arrangement. Do we have rights to get our funds back from the fiscal sponsor upon termination?

Answer: While the specific rights of each party would be determined by the specific fiscal sponsorship agreement at issue, it is very likely that the fiscal sponsor has retained the sole discretion and control (also known as “variance power”) over how to disburse the funds raised in furtherance of the charitable purposes of the project when the fiscal sponsorship is terminated.

Fiscal sponsors are often amenable to transferring funds to a new fiscal sponsor or to the sponsored organization, so long as the sponsored organization has acted responsibly, carried out the project as planned, and not misused the funds or otherwise engaged in improper conduct. However, fiscal sponsors are generally under no obligation to do so, due to the above-mentioned variance power. In other words, fiscal sponsors virtually always have the power to decide to disburse the funds to another organization (upon termination or at any point in the relationship) if the fiscal sponsor determines that this would more effectively achieve the charitable purposes of the project.

This power is necessary because otherwise the sponsor would be considered merely a “conduit” for the distribution of funds raised, which would jeopardize the deductibility of donations made for the project and impose risks on private foundation grantors. Unfortunately, this leaves sponsored organizations with little leverage in the event the fiscal sponsor relationship is terminated.

Planning Tip – Even though fiscal sponsors must retain variance power over funds raised, it is still helpful to address the final disbursement of funds upon termination in the fiscal sponsorship agreement among other standard fiscal sponsorship agreement provisions. For example, this could include detailing the final benchmarks, reports, and other compliance steps required of the sponsored organization as a prerequisite to the release of remaining funds upon termination. When the parties have thoughtfully addressed these final steps in the agreement, the fiscal sponsor will be more likely to cooperate and adhere to this framework when the relationship comes to an end, notwithstanding the fact that the fiscal sponsor will be the final decisionmaker on this matter.

In summary, sponsored organizations generally do not have the power to control the disbursement of funds remaining when a fiscal sponsorship is terminated. Therefore, it is in your best interest to be fully transparent with your plans and communications, respectful of your fiscal sponsor, and cooperative as you approach the end of your relationship, as this will greatly increase your odds of a smooth and productive transition.

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