What is a disqualified person for private foundations?
A disqualified person, commonly referred to as a “foundation insider,” is a person who can potentially exercise control or influence over the foundation because of their close relationship to the foundation. A disqualified person can be an individual, a corporation, a partnership, a trust, or another legal entity.
The IRS provides a precise definition of “disqualified person” but it makes for heavy reading—here is a link to the official IRS definition of disqualified persons.
Below we simplify the definition to get to the core idea—please note that this summarized description is not comprehensive. The summarized description of a disqualified person includes the following:
- All foundation managers. This includes officers, directors, trustees, and mangers as well as individuals with similar powers and responsibilities.
- All substantial contributors to the foundation. A substantial contributor is any person who has contributed more than 2% of the total contributions received by the foundation and who has provided more than $5,000. Legal entities such as corporations, partnerships and trusts can be substantial contributors.
- Owners of businesses that are substantial contributors. Businesses such as corporations and LLCs can be substantial contributors when the business itself donates money to a private foundation. Owners of these businesses can be disqualified persons if they meet certain requirements such as owning more than 20% of the business.
- Family members of disqualified persons. The family members of disqualified persons can also be deemed disqualified persons. This includes an individual’s spouse, ancestors, lineal descendants, and spouses of lineal descendants. A brother or sister of a disqualified person is not a member of the family for this purpose.
- Businesses owned by disqualified persons. A business can be a disqualified person if its owner is a disqualified person. For example, if Richie Rich Jr. is a disqualified person due to large contributions to a foundation, then his disqualified person status can pass through him to any businesses that he owns. The ownership threshold for a business to take on disqualified person status from its owners is generally 35 percent of the voting power of the business. The 35 percent can be met cumulatively by multiple owners of the business who are disqualified persons.
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