Operational Tips to Keep Foundation Trustees Out of Trouble

Foundation trustees should be aware of the IRS self-dealing rules for private foundations, defined generally as restrictions on transactions between private foundations and related people. These rules limit the types of transactions trustees can lawfully engage in and often are antiquated and, at times, nonsensical. Nevertheless, a cursory review of these rules for both new and current foundation trustees is worthwhile and can keep the foundation as well as its trustees out of trouble. Two of the most common types of self-dealing violations pertain to rental payments and use of foundation credit cards.

Rental Payments to Trustees: Rental payments by a private foundation to a private foundation trustee, even if below market rate or even only $1, are not allowed, as they are considered a form of self-dealing. However, free rent is permissible and is not considered self-dealing. Ironically, a rental payment by a public charity to one of its board members is acceptable if the rental payment is reasonable.

Use of Foundation Credit Cards: Another common example of a self-dealing transaction is the accidental use of a foundation’s credit card by a disqualified person, usually a senior foundation management employee or a foundation trustee, for personal use. Technically, this type of transaction would be considered a loan from the foundation, which is defined as a self-dealing transaction. Some attorneys will argue that if the disqualified person reimburses the foundation before the due date of the credit card payment, the transaction would not constitute self-dealing since no harm is done. However, most legal experts who specialize in private foundations would disagree, stating it is irrelevant if reimbursed immediately and no harm is done. To help avoid the possibility of an accidental personal use of a foundation credit card, foundations should request credit cards with unique coloring and bold foundation lettering on the face of the card.

Other Operational Tidbits:

Review of Insurance Policies: Periodically, foundations should undergo an independent review of all their insurance policies for both adequacy of coverage and pricing. Nowadays, cyber insurance coverage should be considered as well. Directors and officers liability insurance protects foundation trustees from claims such as sexual harassment, wrongful termination of employment and failure to perform their fiduciary duty. Private foundations should also ascertain the policy is a nonprofit policy. Generally speaking, a nonprofit policy has a lower premium than a commercial policy and it covers key management employees and volunteers. Nonprofit policies also cover attorney fees. Moreover, foundations should make sure the policy allows coverage for both reasonable legal fees incurred by the foundation’s lawyer as well as legal fees incurred for lawyers appointed by the insurance company.

Staff Sharing Arrangements: Recently, many medium-sized private foundations have been sharing certain staff, especially when a foundation may not have a need for a full-time employee. This is most common in the human resources and information technology fields. For foundations sharing employees, it is strongly recommended that all parties enter a cost-sharing agreement, documenting a reasonable allocation of time and costs. If one of the parties is a family office or a family business related to the foundation, the self-dealing regulations relating to reasonable compensation should be reviewed. Reasonable is defined as what similar people are paid for similar work at similar foundations.

Thomas Blaney, a certified public accountant, is a partner and practice leader of the Private Foundation Practice at PKF O’Connor Davies. He will be leading a session at Philanthropy Roundtable’s Annual Meeting in October on common mistakes foundations make on the IRS 990-PF form.

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