The economic, social and medical turmoil of the past few years is no secret. The cumulative impact of Covid-19, social turmoil, the Russia-Ukraine conflict and natural disasters (such as wildfires and hurricanes) has dramatically increased need everywhere.

Macroeconomic variables such as rising interest rates and inflation have amplified those challenges, making it difficult for the philanthropic sector to address people’s needs. According to Giving USA’s 2023 annual report, total giving was down in 2022, with giving by individuals showing the sharpest decline. 

However, the same report shows that giving by foundations increased 2.5% in 2022. Meanwhile, when we looked at the data from our own organization, Foundation Source, and our nearly 1,000 private foundation clients, we found that these clients gave 14.7% more in 2022 than 2021, for a total of $865 million in 2022 charitable aid.

Given the decline in total giving, contributions from committed philanthropists and private foundations are increasingly vital in this environment. So as the busy year-end giving season approaches, it’s important to consider the strategies your clients are using to deploy their dollars to people in need.

Grants To Individuals
To expedite assistance and cast a wider net of charitable support, private foundations are increasingly making direct grants to individuals, a unique way they can give in addition to their more common methods. Foundations do not need to set up a separate nonprofit for granting directly to individuals and families, and they don’t always need to seek prior approval from the IRS.

Our private foundation clients took advantage of such grants in 2020 to help address emergencies and hardships stemming from the pandemic shutdowns, and we observed a resurgence of these gifts in 2022 as charities faced challenging economic conditions. Your clients with family foundations may consider grants to individuals in the coming months as they continue looking for ways to stretch their philanthropic dollars and help their communities.

Types Of Grants
As long as certain procedures are followed, and a foundation’s bylaws permit them, private foundations can make several types of direct grants to individuals. Some require advance approval from the Internal Revenue Service while many do not.

Fortunately, even when IRS approval is required, it’s needed only once for the overall program, not for every grant. Once approval is obtained, a private foundation may continue making grants under the approved program indefinitely, as long as the program is not modified in any material way. However, if a foundation sought to greatly alter the program—say, by changing who is eligible—then the IRS would have to reapprove it.

No Approval Necessary
The following grants don’t require IRS approval:

• Emergency assistance grants provide financial aid for individuals and households that have experienced some kind of life-altering emergency, tragedy or natural disaster that has rendered them unable to meet their basic needs. Recipients do not have to demonstrate financial need.

• Hardship assistance grants are designed to ameliorate the transitory hardships suffered by people after a job loss, a family illness or a temporary displacement. To be eligible for assistance, applicants must demonstrate financial need.

• Medical emergency/distress relief is typically given to those suffering a physical and mental trauma after a life-threatening illness. Eligible applicants include people in need of short-term counseling for stress. Because of the urgency of the situation, as with emergency assistance grants, the applicant is not required to provide the foundation with a financial background.

• Awards also don’t need to be reported for certain charitable objectives—for example, the awards given to journalists for excellence. This type of grant program does not require advance IRS approval if the awards are given in recognition of past accomplishments and don’t impose any conditions on how the funds must be spent by the recipient.

IRS Approval Necessary
By contrast, foundations seeking to award grants to individuals for travel, study or similar purposes must obtain advance IRS approval for the programs. Such giving would include grants for scholarships and fellowships; grants for specific objectives (for example, for recipients writing a novel or creating a sculpture); grants to produce a report; or grants for someone to improve their skills or nurture a talent (for example, to learn a musical instrument or to receive vocational or advanced sports training).

In addition, foundations making grants for travel, study or similar purposes must:

• Adopt reasonable oversight procedures to ensure the funds are spent for the intended purpose;

• Obtain grantee reports so the foundations can exercise oversight over the activities funded by the grant;

• Investigate any indication of a misuse of funds and retain related records;

• Obtain regular reports (annually at least) from scholarship and fellowship grantees. These reports will typically include a list of the recipient’s courses and grades and a final report after the student has completed coursework. However, these reporting and investigation requirements are deemed satisfied if the foundation pays the grant funds directly to an educational institution, which would agree to apply the grant toward the grantee’s educational costs only if the grantee is enrolled and in good standing.

Tax Rules For All Grants To Individuals
IRS approval aside, private foundation tax rules require the following for all these types of grants:

• The grant should go to what the IRS recognizes as a charitable purpose, such as the alleviation of human suffering or the advancement of education or science.

• The group of individuals eligible to receive the grants should belong to a broad charitable class, meaning a group that is sufficiently large or open-ended. For example, if the group of eligible individuals for a foundation’s emergency grants program were defined as “victims of Hurricane ABC,” that may not be sufficiently large to constitute a broad charitable class, whereas “victims of Hurricane ABC and all future natural disasters” should be considered a broad charitable class, as the exact number of individuals who are eligible is not fixed.

• The grant recipients should be selected in a fair and evenhanded manner with objective and nondiscriminatory criteria. The IRS has said that a school policy favoring racial minority groups with respect to admissions isn’t discriminatory when the purpose is to promote the school’s nondiscriminatory policy. However, in 2023, the Supreme Court held that universities must not favor applicants on the basis of race in evaluating them for admission, even though personal experiences related to race may be taken into consideration. As a result, the IRS may modify its position to align with the Supreme Court’s decision by prohibiting private foundations from using race as a factor for eligibility or selection.

• The foundations should comply with basic recordkeeping requirements showing how and why an individual was selected as a grant recipient.

• When making grants to assist individuals in urgent need, such as in the aftermath of a natural disaster or other hardship, foundations should make an objective evaluation of an individual’s needs at the time the grant is made and set the grant amount accordingly.

Private foundations use grants like these for a variety of charitable objectives. If you take the time to help clients navigate the applicable tax rules and tactically plan their distributions, you’ll play a vital role in helping them make a tremendous and direct impact on the lives of individuals both near and far.

Jeffrey D. Haskell, J.D., LL.M. is the chief legal officer and Jennifer E. Bruckman, J.D., is the deputy legal officer for Foundation Source, which provides comprehensive support services for private foundations. Contact them at [email protected] and [email protected].