Charitable giving options

Can private foundations give to individuals?

Yes, they can! Although the vast majority of private foundation grants are provided to public charities, the Internal Revenue Code allows foundations to make grants to individual people as well. The grants must demonstrate a charitable purpose and be awarded on an objective and nondiscriminatory basis. Further, grants to individuals must be permitted by the governing documents of the foundation and in some cases advance approval of grantmaking policies and procedures by the IRS can be required. As long as certain rules and procedures are followed, grants to individuals for disaster relief, relief of economic distress, or artistic achievement do not require pre-approval by the IRS. Likewise, advance approval from the IRS is not needed if a private foundation runs a scholarship program by outsourcing the administration and selection of the winners to a third party such as a community foundation or a school. However, foundations that wish to directly operate their own scholarship program and be involved in choosing scholarship winners must obtain approval from the IRS ahead of time.

The most common type of grants to individuals are those made to individuals in need of emergency relief after natural disasters or other emergencies. Some other reasonable justifications for providing direct aid include family illness, domestic violence, and job loss. Grants can be made to recipients in the form of cash stipends or physical items such as food, clothing, blankets, and toiletries. One great benefit of using private foundations to help individuals and families in need is that the original donor to the foundation receives a tax deduction. A tax deduction is allowable for the original donor only if the funds are first channeled into a foundation. No tax deduction would be allowable if the original donor gave funds directly to the person in need. For example, if Johnny B. Good, a private person, gives money directly to help Hard-Knock Harry by writing a personal check, then Johnny cannot claim a tax deduction. However, if Johnny instead contributes the money to a private foundation, which in turn provides a grant to Harry, then Johnny can claim a deduction.

When providing such aid, the foundation must be careful not to violate the self-dealing rules (directly or indirectly benefiting the foundation insiders or their families). The foundation must ensure that the set of individuals eligible to receive the grants is big enough so that the recipients constitute a large group of people rather than a small set of pre-selected people. Directly supporting families and people in need can provide a very personal dimension to your giving and can perhaps be more rewarding than sending grants to large nonprofit organizations. 

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Charitable giving options