Foundation Governance and Compliance

Why Governance Matters for a Private Foundation

A private foundation is not simply a named account at a brokerage. It is a distinct legal entity — typically a nonprofit corporation or charitable trust — with its own obligations to the IRS, its state of formation, and the public. The family's name may be on the door, but the law treats the foundation's assets as permanently dedicated to charitable purposes. That distinction carries real consequences for how the board must behave.

Poor governance does not need to be intentional to be costly. Excise taxes on prohibited transactions are strict-liability in many cases, meaning the IRS does not require proof of bad faith. Families who treat governance as paperwork rather than substance tend to accumulate problems quietly until an audit or a family dispute makes them visible. A qualified attorney and CPA experienced in tax-exempt organizations should be involved from formation onward, and periodically consulted as the foundation grows and family circumstances change.

Board Composition and Succession

Most private foundations begin with a small board dominated by the founding family. That structure is entirely permitted, but it requires intentional management. Board members owe fiduciary duties — duties of care and loyalty — to the foundation, which means they must make decisions in the foundation's charitable interest, not their own personal interest.

Succession planning for the board is an area families frequently neglect in the early years. Questions worth addressing in governing documents include: how are new board members nominated and approved, what happens when a founding member becomes incapacitated or dies, and whether independent directors (people unrelated to the family) are expected over time. Some families find that adding one or two independent directors strengthens credibility with large grantees, institutional co-funders, and prospective staff.

Term limits and mandatory retirement ages are governance tools that some foundations adopt to ensure the board evolves alongside the family. Without a succession plan, a foundation can become ungovernable after a founder's death, particularly when multiple branches of a family hold different expectations about the institution's direction. The broader family governance framework a family maintains can provide useful scaffolding for these decisions.

Conflict-of-Interest Policies and the Self-Dealing Rules

The self-dealing rules are among the most important — and most misunderstood — constraints on private foundations. Self-dealing refers to certain financial transactions between a foundation and its "disqualified persons," a legal category that includes substantial contributors, board members, officers, and their family members. The prohibition is broad and, in many cases, absolute regardless of whether the terms would have been fair to the foundation.

Common self-dealing landmines include:

• Family expenses paid by the foundation. Using foundation funds to pay for family travel, meals, or personal services — even when some charitable purpose is claimed — can constitute self-dealing. The line between legitimate program-related travel and personal benefit is narrower than many founders initially assume.
• Compensation of family members. Family members may be paid by the foundation for genuine services, but compensation must be reasonable and documented. Excessive pay is both a self-dealing concern and a potential intermediate sanctions issue. Benchmarking compensation against comparable roles and documenting the process is essential.
• Use of foundation assets. A disqualified person using foundation property — office space, equipment, or investment assets — for personal benefit is a prohibited transaction even when the foundation appears to suffer no economic harm.
• Loans and credit arrangements. Loans between the foundation and disqualified persons are generally prohibited regardless of interest rate or repayment terms.

A written conflict-of-interest policy does not override the self-dealing rules, but it creates a procedural framework that helps board members recognize and escalate potential issues before they become violations. Board members with a personal interest in a matter should be required to disclose it, recuse themselves from discussion, and have that recusal documented in meeting minutes.

The Annual Filing Reality

Private foundations file Form 990-PF annually with the IRS. This is a public document, meaning any member of the public — including journalists, grantees, watchdog organizations, and the foundation's own grantees — can review it. The return discloses grants made, investment holdings, officer compensation, and the foundation's calculation of its required minimum distribution, which is the amount the foundation must pay out each year in qualifying charitable expenditures.

The 990-PF is not a simple tax return. It requires reconciling investment income, tracking the distributable amount, confirming that excise taxes on net investment income have been calculated correctly (a lower rate may apply if the foundation meets certain distribution thresholds — a qualified tax-exempt organization advisor can explain the current mechanics), and disclosing any transactions with disqualified persons. Missing the deadline or filing incorrectly can trigger penalties. Many foundations engage a CPA firm with exempt-organization experience specifically for this return.

State-level compliance adds another layer. Most states require separate charitable registration and reporting, and some states impose additional requirements on foundations operating or soliciting within their borders. A foundation that makes grants to organizations in multiple states may need to track those states' rules as well.

Investment Oversight Duties

Board members are responsible for overseeing the foundation's investment portfolio with the same fiduciary care they apply to grantmaking. This does not require every board member to be an investment expert, but it does require the board to establish a written investment policy statement, select and monitor investment managers or advisers with appropriate diligence, and document the process by which investment decisions are made.

Jeopardizing investments — those made in a manner that could jeopardize the foundation's exempt purpose — are a distinct category of prohibited transaction subject to excise taxes. This provision is less frequently triggered than self-dealing rules, but it is relevant when foundations consider speculative strategies or investments that might be appropriate for a family's personal portfolio but are harder to justify at the institutional level.

Families increasingly explore impact investing through their foundations, including program-related investments (PRIs) — investments made primarily to accomplish a charitable purpose rather than to generate financial return. PRIs carry their own documentation requirements and legal standards. The investment committee structure used by some foundations, separating investment oversight from grantmaking decisions, can help clarify responsibilities and provide an audit trail.

Staffing Versus Outsourced Administration

A foundation with modest assets and a straightforward grantmaking program often runs effectively with outsourced administration — a part-time grants manager, a CPA for the 990-PF, and an investment adviser. As the foundation's assets and grantmaking ambitions grow, dedicated staff become more practical and often more cost-effective than assembling a collection of outside vendors.

Hiring a foundation president or executive director is a significant step. It formalizes the institution, introduces employment law obligations (detailed in the context of family employment more broadly at Family Employment Policies), and requires the board to shift from doing the work itself to overseeing someone else who does it. The governance documents should clearly define what decisions staff can make independently and which require board approval.

Directors and officers of a foundation face personal liability exposure in certain circumstances, particularly for willful self-dealing violations. Many foundations purchase directors and officers liability insurance — commonly called D&O coverage — as a practical risk management measure. Indemnification provisions in the foundation's bylaws and articles of incorporation provide a parallel layer of protection, though their enforceability in cases of intentional misconduct varies by state law. A qualified attorney should review these provisions when the foundation is formed and periodically thereafter.