Can a Private Foundation Give a Grant to an Individual?

This is a very common question that we receive often from donors as we administrate their private foundations. At times the question is regarding someone going through a financial crisis, other times it is for someone taking a trip to do charitable work, perhaps it is a family recovering from a disaster or maybe someone that needs help with medical bills or school tuition.

So, is it possible? Can it be done? The answer is yes and no, it depends. There are also many hoops to jump through to do it correctly. Of course, it is always easier for a private foundation to make a grant to a public charity that is already carrying out a program that accomplishes the same thing. But what can be done when there isn’t a public charity doing exactly what the private foundation desires? This article will shed light on how and when a private foundation can make these types of grants.

Grants to individuals can be a very effective way for private foundations to carry out their tax-exempt purposes, so long as the proper setup and oversight is taken. The IRS has specific requirements that must be followed before making any direct grant payments to individuals. Failure to follow these requirements before making payments to individuals, for any reason, will be considered taxable expenditures.

The IRS outlines the following basic requirements must be met for a private foundation to make grants directly to individuals: https://www.irs.gov/charities-non-profits/private-foundations/grants-to-individuals

The grant must be awarded on an objective and nondiscriminatory basis to accomplish the foundation’s charitable mission.
The grant program and policy of the private foundation must be approved in advance by the IRS, and
The IRS requires that one of the following criteria be met:
1. The grant is a scholarship or fellowship and is to be used for study at an educational institution that normally maintains a regular faculty and curriculum and normally has a regularly organized body of students in attendance at the place where the educational activities are carried on. For these purposes, grant recipients need not be limited to degree candidates, nor must the grant be limited to tuition, fees, and course-required books, supplies and equipment. A recipient may use grant funds for room, board, travel, research, clerical help or equipment, that are incidental to the purposes of the scholarship or fellowship grant.
2. The grant qualifies as a prize or award that is excludible from gross income under Internal Revenue Code section 74(b), if the recipient is selected from the general public. For this purpose, the recipient may keep the prize or award, and need not authorize the foundation to transfer the prize or award to a governmental unit or to another charity.
3. he grant’s purpose is to achieve a specific objective, produce a report or similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or similar capacity, skill or talent of the grantee.

Should a private foundation engage in making grants directly to individuals, it is also required to keep accurate records demonstrating compliance with the above IRS regulations, including the grant making program and policy, records of the selection process, how the grant is given, and finally how the funds were awarded and used.

Additionally, the IRS further defines the following:

IRS Advance Approval:

https://www.irs.gov/charities-non-profits/private-foundations/advance-approval-of-grant-making-procedures

Grants to individuals must be made in accordance with procedures approved in advance by the Internal Revenue Service. To secure such approval, a private foundation must demonstrate in its request for advance approval that:

Its procedure awards grants on an objective and non-discriminatory basis;

The procedure is reasonably calculated to result in performance by grantees of the activities that the grants are intended to finance; and

The foundation will supervise grants to determine whether grantees have fulfilled the grant terms.

No single procedure or set of procedures is required. Procedures may vary depending upon such factors as the size of the foundation, the amount and purpose of the grants, and number of recipients.

Approval is based on an evaluation of a foundation’s entire system of standards, procedures, and follow-up. Hence, separate approval for each grant program is not required. Once obtained, such approval applies to any subsequent grant program of the foundation if the procedures under which it is conducted do not differ materially from those described in the original request for approval.

Objective and Nondiscriminatory Basis:

https://www.irs.gov/charities-non-profits/private-foundations/private-foundations-selection-of-grantees-on-an-objective-and-nondiscriminatory-basis

The group from which the grantees are selected must be reasonably related to the purposes of the grant, and the group must be large enough to constitute a charitable class (unless, taking into account the purposes of the grant, only a few individuals are qualified to be grantees – as in the case of scientific research),

The criteria used in selecting grant recipients from the potential grantees should be related to the purpose of the grant. For example, proper criteria for selecting scholarship recipients might include (but are not limited to) the following: past academic performance, performance on tests designed to measure ability and aptitude for college work, recommendations from instructors, financial need and the conclusions the selection committee might draw from personal interviews, and the person or persons who select recipients of grants should not be in a position to receive a private benefit, directly or indirectly, if certain potential grantees are selected over others.

Can a Private Foundation Give a Grant to an Individual?

IRS Advance Approval:

Objective and Nondiscriminatory Basis:

Open a New DAF Account

Thank you!