Yes, as an exception to the self-dealing rules, private foundations are allowed to hire family members of the original founder as well as the current directors and other disqualfied persons as long as certain guidelines are followed. Family members can serve on the board of directors, as executives and as regular paid staff. The positions themselves must generally be managerial in nature or for "personal services" (please see our article on self-dealing for a brief description of "personal services"). Any and all compensation must be reasonable for the services rendered and the family members must be qualified to provide the services. The jobs themselves must be genuinely necessary for the foundation to work towards its charitable purpose—real work must be occurring. The compensation paid cannot be excessive and must be in agreement with what is ordinarily paid to other people working in similar positions and circumstances.
Of course, what constitutes reasonable compensation varies widely depending on the underlying facts and circumstances—there is no definitive formula. Fair compensation depends on a wide variety of variables including the individual’s job description, the skill required, and the time spent working. It also depends on the foundation’s endowment size, methods of grantmaking, dollar amount of grants, and the salaries paid at other organizations for similar positions. In practice, many foundations hire compensation consultants to compare their proposed compensation amounts to the marketplace to assure compensation levels are justifiable.
Private foundations can be subject to intense public scrutiny, especially when they appear to be inappropriately benefitting family members with excessive compensation. Instituting a conflict of interest policy gives the organization’s leadership a process to guard against improper conduct. A well-crafted conflict of interest policy should excuse those individualswith a potential conflict of interest from the decision-making process and should require the organization’s leadership to consider all the relevant facts and circumstances. Adhering to a thorough conflict of interest policy can help resolve potential compensation issues before they emerge.
The penalties for family members improperly benefiting from foundation assets can be severe. Private foundations exist to serve the general public with a charitable mission, not to serve the private interests of family members. If family members abuse their position and improperly benefit from the foundation, both the foundation and the individuals involved can be subject to substantial monetary fines. If the exploitation is egregious, the foundation risks losing its tax-exempt status and might need to dissolve. Misconduct of this kind is very rare.
Of course, paying family members is purely optional, and the majority of private foundations do not have any paid staff. It is common for family members to volunteer their time to manage the foundation to help keep administrative costs low. However, the more time-consuming and complex the operations of a foundation become, the more appropriate it is to hire paid staff. Family members can be great employees because they are oftentimes more committed to the foundation and have a better understanding of foundation goals. Given the right circumstances, hiring family members can be the right choice and make a foundation more impactful.
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