As the year comes to a close, family foundations have an important opportunity to review their governance practices, ensure compliance, and refine strategies to better align with their philanthropic missions. A proactive year-end review can help minimize risks, maximize impact, and prepare for future success. Below, we outline key best practices to guide your family foundation’s governing board.
Best Practices for Private Family Foundations
For a strong year ahead, you should perform a detailed and thorough review of your policies, procedures and processes to reduce the risk of fraud, avoid penalties for self-dealing and keep your organization on mission. Review your practices, focusing on the following areas:
Refresh Governance Documents
Your foundation’s governing documents—such as Articles of Incorporation, Bylaws or Trust Agreements—are your foundation’s cornerstone of compliance and strategic alignment within your organization. Take the time to ensure they’ve been adjusted to reflect changes to state laws affecting the foundation as a not-for-profit or charitable trust, and as a 501(c)(3) organization and private foundation. You may need to revise these documents to reflect your foundation’s existing practices and goals while providing additional flexibility to meet those goals.
Review Registrations and Reporting Requirements
Maintaining state and federal registrations is essential for compliance and avoiding penalties. To stay on track, confirm your filings are current with your state’s charity regulatory body, often the Attorney General, and the IRS. Consider creating an annual checklist of filing deadlines and requirements to simplify ongoing compliance. Different states have different reporting and compliance requirements. The normal IRS filing deadline for foundations is 4.5 months after year end. Foundations can file for a 6-month extension, but it must be requested. You should also keep other traditional business compliance and filings, such as 1099s, W-2s, 941s and other common filings in mind in addition to your 990s.
Strengthen Board Governance to Follow Family Foundation rules
A well-informed and engaged board is vital for effective oversight. Consider implementing the following governance practices:
- Educate the board on their fiduciary duties and leadership roles
- Provide training to help prevent abuse of foundation assets
- Update or introduce templates for meeting minutes and policies
Reassess Grantmaking Structures
Your foundation’s grantmaking structure should evolve alongside your mission and the interests of family members. Questions to explore include:
- Should individual trustees have discretionary grantmaking budgets?
- When should the next generation get involved in a grantmaking committee?
- Would restructuring grantmaking processes enhance the foundation’s impact?
Review your grantmaking documentation to ensure your guidelines, templates and procedures are robust enough to address unique circumstances, such as:
- Concurrent grants by the foundation and disqualified persons, e.g., directors, family members or businesses
- Scholarships and special grant agreements requiring additional oversight
Proactively Address Self-Dealing Risks
Self-dealing and private inurement is a common risk for family foundations due to the overlapping relationships among family members, businesses and the foundation. It can arise when the foundation fulfills a charitable pledge made by an individual, enters into a service or space-sharing agreement with a family office or family business or the foundation compensates disqualified persons. Problems can also arise if an individual receives a benefit from a donation, a donation is made to an improper donee, or loans are made to a disqualified person. Be sure to identify any persons or organizations who are disqualified persons and expenditures are appropriate.
If self-dealing or private inurement are discovered, take immediate corrective action, including notifying the IRS and creating a plan to prevent future occurrences. This plan can include plans for educating and training your current foundation board and staff on how to identify and successfully navigate self-dealing situations.
Evaluate Compensation Arrangements
Ensure any compensation provided to officers, directors or service providers complies with IRS guidelines and avoids triggering self-dealing penalties. A periodic review of contracts, salaries and benefits is essential to staying compliant.
Conduct a Compliance Spot Check
Family foundations must navigate a range of complex rules. Before year-end, review compliance with:
- Expenditure responsibility
- Excess business holdings
- Foreign grantmaking
- Geographic relocation
- Jeopardizing investments
- Scholarships
- Pledges
- Minimum distributions
- Conflict of interest
- Engagement in political activities
Year-end is a great time to review long-term goals and governance strategies. Are your current practices setting the foundation up for sustained success? Consider how your foundation might adapt to leadership changes, geographic relocation or evolving state and federal legislation.
Anders Family Wealth and Estate Planning advisors provide personalized guidance for high-net-worth individuals and families to help protect your wealth and achieve your goals. Learn more about our services, and the associated cost, by requesting a meeting below.
