Can private foundations provide scholarships?
Yes, private foundations can provide scholarships to individual recipients. The scholarship program must be permitted by the governing documents of the foundation and all scholarships must be awarded on an objective and nondiscriminatory basis. In providing scholarships, foundations must be careful not to violate the self-dealing rules (directly or indirectly benefiting the foundation insiders and their families). Additionally, foundations must ensure that the set of individuals eligible to receive the scholarships is big enough so that the recipients constitute a large group of people rather than a small set of pre-selected people.
Depending on how the scholarship program is administered, pre-approval by the IRS may be required. Pre-approval by the IRS is not needed if the foundation outsources the scholarship program administration and the selection of the winners to a third party such as a community foundation or a school. In this case the foundation is essentially just putting up the money and another organization oversees the scholarship program. The foundation can still define the eligibility criteria in general, such as age, income level, and the field of study but the partner organization manages the program and selects the scholarship winners.
If a private foundation wishes to operate its own in-house scholarship program and directly select winners then the foundation must apply for approval by the IRS. In the application the foundation must carefully define the scholarship program procedures. The IRS will want to know about the scholarship selection criteria, the selection committee, the amount of the scholarships, how the scholarships will be promoted, and how the awards will be monitored to assure they are used for their intended purpose. It can be very beneficial to consult with legal counsel to ensure the program complies with all the IRS rules and regulations. In general, it is a good idea to keep the program parameters as broad as possible to help assure that the program isn’t limited in the future. If a foundation starts its own directly operated scholarship program without pre-approval by the IRS, then all scholarship grants are considered taxable expenditures (i.e., the foundation will be fined for violating IRS regulations).
When operating scholarship programs directly, private foundations must keep detailed records showing how and why each individual winner was selected as well as the winner’s name, address, and scholarship amount. Furthermore, foundations should obtain evidence that the recipient uses the funds as intended, especially for those scholarships with multiple distributions. The most common verification method is a transcript of a student’s grades. If a scholarship recipient misuses the money or no longer qualifies for the program (e.g., bad grades), then the foundation should cut off any payments and attempt to recuperate the funds if possible.
Providing scholarships can be a very rewarding way to carry out philanthropic giving. It can be very fulfilling to meet the recipients individually and see the difference scholarships make in people’s lives. Private foundations that operate scholarship programs are governed by a fairly complex set of IRS rules and regulations; if your foundation is considering setting up a program it is probably best to consult with a professional to assure it is well-structured and properly set up.
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