Many wealthy people who create charitable foundations want the foundations to be run by members of the family. However, putting family members in charge of foundations invites increased IRS scrutiny.

It is often an excellent idea to have a family foundation be directed by members of the family. It is a great way to help ensure that the goals of the foundation remain the same as the goals of the person who created the foundation. Consequently, many wealthy people will ask children or siblings to run their foundations.

This “keep-it-in-the-family” approach may not be the best in every family.

The New York Times, in “When Family Members Run Foundations, Scrutiny Never Ends,” identifies some of the potential pitfalls awaiting unwary family members when running a family foundation.

A few of the potential problems detailed in the article are:

• Compensation – Family members who are paid to work for the foundation must be paid a salary that would be ordinary and reasonable for non-family members working in the same positions in similar organizations.
• Travel Expenses – Family members who travel on foundation business can be compensated for their expenses. However, they cannot bring other people with them and charge the foundation for their expenses too. For example, the children cannot be taken along and their expenses may not be charged to the foundation.
• Self-Dealing – One of the biggest ways for family members to get in trouble is when the foundation deals with family members. For example, if the foundation rents office space in a family-owned building, the rent paid must not be excessive.

If you are considering creating a family foundation, speak with an estate planning attorney about how to set everything up properly so that your family does not run afoul of the IRS.

For more information about estate planning, please visit my estate planning website.

Reference: New York Times (September 11, 2015) “When Family Members Run Foundations, Scrutiny Never Ends”