Most private foundations only give grants to public charities, since that is the safest way to avoid excise taxes and other penalties which a foundation may incur if it makes grants to inappropriate recipients. And grants to individuals from private foundations for study or travel always require IRS pre-approval of the grant-making process.
But from time to time, foundations may be confronted with compelling situations in their communities (or elsewhere) where they would like to make direct grants to needy individuals. Those situations may arise as a result of cataclysmic events like hurricanes, earthquakes, or floods. Or there may be individuals generally in need (because of poverty or sickness) that the foundation would like to help.
Of course, any grants to foundation insiders known as "disqualified persons" (see our August 2002 and March 2001 Tax and Trusts & Estates Updates) are prohibited, even if the recipient is in need. Furthermore, no grants should be made to individuals if the grant might directly or indirectly benefit a disqualified person. For example, a grant to pay the uninsured medical expense of the housekeeper of the foundation's founder is likely to be unacceptable to the IRS. And the penalties for improper grants are significant; the grantmaking could even result in the loss of your foundation's tax exempt status.
Instead, if your foundation wants to make direct gifts to certain needy individuals, it should follow strict guidelines to make certain that the grant is appropriate:
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Check your governing instruments (trust document, certificate of incorporation, bylaws) to confirm that the grant can be made. Some foundation governing instruments may only allow grants to public charities, not individuals.
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Define the group of eligible grantees (e.g., homeowners in XYZ county who have made claims for emergency disaster relief; individuals in ABC county who are eligible for low-income housing). If the class of potential recipients is too small, it can present a problem. For example, expanding the class to include applicants for relief in future disasters may be helpful.
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Establish a process to "get the word out" on grant availability through local newspapers, etc.
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Establish a process to ask the right questions to determine if any of the recipients are connected with any "disqualified persons."
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Get the names and addresses of all recipients for 990-PF reporting purposes.
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Keep records of all of the foregoing.
Note that unlike scholarship and travel grants, the process by which these grants are awarded does not need to be "pre-approved" by the IRS.
These types of grants are an especially good way to provide "hands-on," tangible and immediate benefit at a very local level. Many foundations would welcome the opportunity to make these types of gifts, especially where there is a compelling and immediate need. The IRS has published general guidance on making these direct grants, but a carefully crafted program specific to your foundation's objectives will need "fine tuning" by your tax attorneys. This may be a great way for your foundation to do good, but the program needs to be carefully orchestrated in order to avoid excise tax exposure or even greater tax risks.
