When forming a private foundation, many people wonder whether family members can serve on the board. The short answer is yes, family members can serve as board members of a private foundation. In fact, family foundations are often run by multiple generations of the same family to achieve philanthropic goals while keeping decision-making and operations close to home.
Considerations for Family Foundations
While it's legal and common for family members to serve on the board, there are several important factors to keep in mind:
IRS Rules on Self-Dealing
Even though family members can serve on the board, private foundations must follow strict rules against "self-dealing." Self-dealing occurs when a board member or related parties (known as "disqualified persons") engage in financial transactions with the foundation that benefit them personally. For example, a family member cannot be compensated for services like consulting unless it falls under an IRS exception. Foundations should ensure transactions remain above-board to avoid penalties.Maintaining Objectivity
While family-run foundations can operate smoothly, there's potential for conflicts of interest. It’s important that family members serving on the board remain objective when making financial or grant-related decisions to avoid the perception of favoritism. Adopting clear policies on conflicts of interest can help safeguard the foundation's reputation and ensure compliance with IRS regulations.Succession Planning
Many private foundations are formed with the intent of being managed by future generations. When family members serve on the board, it's a good idea to have clear plans for leadership transitions. Establishing policies for succession can help ensure the foundation continues to operate smoothly across generations.
Compensation for Family Members on the Board
Family members serving on the board of a private foundation can receive reasonable compensation for their work, but this is subject to careful scrutiny under the IRS's self-dealing rules. If compensation is paid, it must be for actual services provided (e.g., management, grant administration) and be deemed "reasonable" by IRS standards. Overcompensation or inappropriate payments could lead to penalties or loss of tax-exempt status.
Best Practices for Family Foundations
To ensure compliance and effective governance, family foundations should:
Implement conflict of interest policies.
Keep detailed records of board decisions and financial transactions.
Follow IRS rules related to compensation and self-dealing.
Consider diversifying the board with independent members or advisors to add different perspectives.
Conclusion
While it's perfectly legal for family members to serve on the board of a private foundation, it's important to stay mindful of IRS rules and potential conflicts of interest. By adhering to best practices, family foundations can ensure they remain compliant while continuing to fulfill their charitable missions.
At Instant Nonprofit, we provide the essential tools and resources to help private foundations stay compliant with IRS regulations. Our services include customizable Conflict of Interest Policy templates designed to ensure transparency and safeguard against self-dealing. In addition, we offer board meeting agenda and minutes templates to help document key decisions, as well as ongoing guidance on best practices for governance. With these tools, private foundations can confidently manage their operations, avoid penalties, and focus on achieving their philanthropic goals.