Understanding Expenditure Responsibility for Private Foundations

by: Kyle Anderson
June 23, 2023
Woman at computer with stack of documents

Achieving a clear understanding ofexpenditure responsibility is vital for private foundation leaders, as itensures the appropriate utilization of foundation assets and enables compliancewith regulatory obligations. Expenditure responsibility serves as a protectivemeasure, assuring that grants allocated to external organizations are strictlyutilized for charitable purposes. This becomes especially important whenprivate foundations provide grants to organizations that are not registered asU.S. public charities. By adhering to expenditure responsibility guidelines,foundations actively uphold transparency, accountability, and legal compliancewithin their grantmaking practices.

In general, expenditure responsibility is not necessary whenprivate foundations grant funds to public charities, which represents themajority of their grantmaking. Public charities already operate under extensivescrutiny and accountability measures. They are typically governed by boards ofdirectors or trustees and undergo external audits and reporting requirements.These organizations have established systems to ensure proper fund usage andcompliance with legal and regulatory obligations. Therefore, when privatefoundations provide grants to U.S. public charities, the existing oversightmechanisms and accountability structures in place alleviate the need for expenditureresponsibility.

However, when private foundations provide grants toorganizations that are not registered as U.S. organized public charities,expenditure responsibility becomes necessary to safeguard the proper use offunds for charitable purposes. In such cases, private foundations shouldcarefully assess each situation and seek guidance from legal and financialprofessionals to determine if expenditure responsibility is required. Thisensures compliance with the appropriate regulations and enables informeddecision-making regarding grantmaking activities.

To fulfill expenditure responsibility requirements, privatefoundations must follow specific procedures. The first step is conducting adiligent pre-grant inquiry to assess the capabilities and commitment ofpotential grantees in executing the proposed charitable activities effectively.This ensures alignment with the foundation's objectives and optimal utilizationof grants.

Once a grant is approved, the foundation and the grantee mustestablish a written grant agreement that outlines the terms, plans, andlimitations of the charitable activity. The agreement should explicitly statethe purposes of the grant and include provisions prohibiting the use of fundsfor unauthorized purposes, such as political activities. Authorized officers,directors, or trustees of the grantee organization must sign the grantagreement, committing to responsibilities such as repaying any unused grantamount and providing comprehensive annual reports to the grantor.

Both the grantee and the grantor play important roles inexpenditure responsibility. Grantees are obligated to provide regular reportsto the foundation, detailing the financial status of the grant and the progressmade in achieving the intended charitable purposes. The grantor (i.e., theprivate foundation) is required to report expenditure responsibility grantsseparately to the IRS on Form 990-PF. This report should include essentialinformation about the recipient, grant amount, purpose, description, andstatus. By reporting grants separately, foundations demonstrate theircommitment to responsible grantmaking practices.

Financial precautions are crucial in expenditure responsibility.Grantees must handle grant funds separately and maintain accurate accountingrecords. This can be achieved through diligent bookkeeping practices or byestablishing a dedicated bank account for grant funds, ensuring properfinancial management and accountability.

It is important to recognize that whileexpenditure responsibility is commonly used in grants to foreign charities, itsapplicability may differ when providing grants to US-based charities engaged ininternational operations. Esteemed organizations like the Red Cross, forinstance, during their humanitarian endeavors abroad, fall into this category.Unlike grants to foreign charities, grants to US-based public charities withinternational operations generally do not require expenditure responsibility.However, understanding when expenditure responsibility is necessary becomes avital consideration for private foundations. To ensure well-informeddecision-making in these cases, private foundations should diligently assesseach situation and actively seek guidance from legal and financial experts.

Additionally, expenditure responsibility guidelines apply whenmaking grants to other private foundations. The donor foundation must followthe same rules, reporting the grants on Form 990-PF and providing recipientinformation, grant amount, charitable purpose, and a description of the grantand its status. The recipient foundation, in turn, must fulfill its owndistribution requirements and expend the total grant award from the privatefoundation within a specified timeframe.

By understanding expenditure responsibility and adhering to itsprocedures, private foundations can ensure the proper utilization of theirgrants and fulfill their philanthropic objectives while maintaining compliancewith legal and regulatory requirements.

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