Following the back-to-back hurricanes that struck first Texas and then Florida and Puerto Rico in late August and September, many grantmakers were left scrambling to identify which disaster relief agencies to support first. With so much destruction and so many people impacted, the situation, for many foundations, called for extraordinary measures, including expanding their usual grant programs to include aid directly to those hit hardest by the storms—a move that can, in theory, speed up the process by bypassing the “middleman” relief agency.
While uncommon, it is possible and perfectly legal to grant funding directly to individuals and families directly impacted by disaster events. But, experts say, there are some rules and best practices that must be followed to stay on the right side of the law.
Corporate Philanthropy Report recently spoke with Jeff Haskell, chief legal officer at Foundation Source, a consulting firm that provides administrative and other support services for private foundations, about the intricacies of this type of grantmaking.
Q: Under what circumstances would a foundation give directly to an individual or family, as opposed to a nonprofit serving them?
A: Many foundations are interested in having a direct impact with their philanthropy and maintaining control over how their charitable funds are applied. Having the ability to select and make grants to individuals who are suffering a financial hardship or were the victim of an emergency addresses both of these priorities. In some cases, such as in the wake of a major natural disaster, there may not be a nonprofit serving all of the impacted individuals. Even if there is a nonprofit serving all of the impacted individuals, a foundation may be able to provide assistance more quickly than another type of nonprofit organization. Finally, even if another nonprofit organization is serving impacted individuals, where hundreds or thousands of individuals are impacted by a disaster, the nonprofit organization may be stretched too thin and be unable to provide the full extent of assistance needed; in that case, a foundation may be able to pitch in and fill gaps.
Q: What special considerations are involved when giving directly to individuals/families?
A: An important consideration, generally, is establishing a way to identify those in need. IRS rules require that grant recipients be selected from a “broad charitable class” of individuals. Many foundations call upon one or more unrelated third parties to act as referral sources, such as members of the clergy, local charities or social workers, to name a few.
Additionally, foundations must be mindful of the importance of retaining the documentation associated with such grants, and must take care when reviewing the applications and assessing the need of each applicant. Special considerations apply to corporate foundations that wish to provide disaster relief to employees of the for-profit donor company.
Q: What specific steps/actions are required by law to do so?
A: Although advance IRS approval is not required for hardship and emergency grants to individuals, there are certain IRS requirements that must be followed, as well as some guidelines that are considered best practice. IRS rules require that grant recipients be selected from an open-ended group of individuals known as a “broad charitable class.” This group must be large or indefinite enough to ensure that the number of members comprising the class is not fixed. For example, while the exact number of victims in a specific community impacted by a single current disaster can be determined with certainty, the exact number of victims who will be impacted by this and future disasters would be indefinite, which should constitute a broad charitable class.
Additionally, as mentioned earlier, the foundation must make a specific assessment of need for each recipient of aid. It is an established rule that charitable funds cannot be distributed to individuals merely because they are victims of a disaster; rather, the foundation must make a specific assessment that the recipient of aid is financially or otherwise in need. Individuals need not be totally destitute to be eligible to receive emergency or disaster relief; rather, they may merely lack the resources to obtain basic necessities.
Foundations are required to maintain certain records with respect to emergency and hardship grants to individuals, including the objective criteria applied to assess need, basic information about the grant and the recipient, and the selection process utilized by the foundation, among other things. Notably, foundations are not required to track how the grant funds are ultimately spent by the recipient.
Lastly, it is recommended that the foundation’s board formally adopt its hardship or emergency assistance grant program and memorialize the board action (e.g., with minutes).
Q: What other factors might apply to such giving by corporations/corporate foundations?
A: One of the most important considerations for employer-sponsored foundations in particular is whether the recipients of aid will be employees of the for-profit donor company. If that is the case, as addressed by IRS Publication 3833, the foundation will not be permitted to make hardship grants to such individuals and will need to abide by certain rules in making disaster relief grants to employees.
Specifically, an employer-sponsored foundation may only make grants for relief in connection with a “qualified disaster.” Qualified disasters include those that result from terrorist or military actions, those that result from an accident involving a common carrier, a presidentially declared disaster or an event that the secretary of the Treasury determines is catastrophic.
Additionally, selection of recipients of aid must be made by an independent selection committee. A selection committee is considered independent if a majority of the members are not in a position to exercise substantial influence over the affairs of the employer.
The foundation should ensure that any disaster relief payments it may make will not relieve the for-profit donor company of any liability it otherwise would have had to its employees.
For more information, Jeff Haskell can be reached at (800) 839-0054 or visit http://www.foundationsource.com.