FA Magazine November 2023 | Page 26

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 shortterm 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 ;

Hardship assistance grants are designed to ameliorate the transitory hardships suffered by people after a job loss , a family illness or a temporary displacement .

• 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 jhaskell @ foundationsource . com and jbruckman @ foundationsource . com .

24 | FINANCIAL ADVISOR MAGAZINE | NOVEMBER 2023 WWW . FA-MAG . COM