Wellness Check For Your Family Foundation

One of the best things that a family foundation's governing board can do is embark on a "Wellness Check" of the foundation. A Wellness Check is a review of the foundation's compliance with state and federal law, filings, key private foundation rules and best practices.

A review of its governance structure, governing documents and foundation compliance matters helps to ensure the foundation has its house in order and is following best practices. This process can also open doors to new opportunities for natural evolution of the foundation—whether engaging new generations, exploring creative grantmaking opportunities or pursuing community partnerships in furtherance of its mission. The scope of review advisable for each foundation will vary depending on its size, age, structure and needs, but typically includes several of the following key components:

1. Refresh of governing documents: Review the foundation's governing documents (typically Articles of Incorporation and Bylaws or Trust Agreement) to ensure they are consistent with changes to state law affecting the foundation as a nonprofit corporation or charitable trust, and as a 501(c)(3) organization and private foundation. Revisions may be advisable to reflect best practices, to provide flexibility and to reflect the foundation's existing practices and goals.
2. Registration and filing review: Confirm that the family foundation's state and federal registrations and reporting requirements are up-to-date with the state regulatory body overseeing charities (typically the Attorney General) and the IRS. This reduces the risk of tax penalties or government inquiries. The foundation may also find it helpful to establish an annual checklist of state and federal filings for reference on an ongoing basis.
3. Governance best practices: Revisit best practices in governance, including educating the board on the role of leadership and their fiduciary duties. This can include recommendations with respect to board engagement, board training, templates for minutes and records, and incorporating best practices into the foundation's governing documents, policies and practices.
4. Grantmaking structures: Revisit the overall structure of its grantmaking with a fresh strategic perspective. A Wellness Check provides a good opportunity to explore new structures with the board in light of the foundation's mission and current leadership. For example, does the foundation want to permit grantmaking by individual family branches? Should individual trustees have discretionary grantmaking budgets? When should the next generation be brought into the family's philanthropy by participating on a grantmaking committee?
5. Grantmaking documentation: Review the foundation's grantmaking documentation and identify areas in which it would be helpful to develop more robust guidelines, policies or procedures. This may include, for example, grant agreement templates, scholarship-related documents, or exploring how to treat special circumstances such as concurrent grants by the foundation and one or more of its "disqualified persons" such as directors, officers, family members or family businesses.
6. Self-dealing and Disqualified Persons: Identify the persons and organizations who are disqualified persons to the foundation and to review any potential self-dealing events under the federal tax regulations that may be occurring. Self-dealing can arise in unexpected ways with family foundations, such as the foundation fulfilling a charitable pledge made by an individual, the foundation entering into a service agreement or space-sharing agreement with a family office or family-owned business, or the foundation compensating disqualified persons. If the Wellness Check identifies that self-dealing has occurred, follow-up will be important to take proactive steps to mitigate and report the transaction, including to the IRS and reducing risk of future self-dealing issues. A "treatment plan" following the Wellness Check can include education and training of the current foundation board and staff on how to identify and navigate potential self-dealing situations.
7. Compensation review: Review the family foundation's compensation arrangements for officers, directors and other individuals who perform services for the foundation to ensure compliance with IRS rules and self-dealing restrictions.
8. Broad issue spotting: Other key issues that can be addressed in a Wellness Check include the foundation's compliance with rules on expenditure responsibility, foreign grantmaking, jeopardizing investments, minimum distributions, excess business holdings, conflicts of interest, geographic relocation, scholarships, pledges and engagement in political activities.
9. Deep dives: Depending on the family foundation at issue, Wellness Checks are customizable, and we are happy to conduct a closer review on any of the above topics, as well as any other concerns your foundation may have.

When Should a Family Foundation Do a Wellness Check?

A family foundation can undertake a legal compliance and Wellness Check review at any time, and many choose to undertake a partial Wellness Check every few years as a matter of course. In addition, the following are a few key circumstances that signal a particularly beneficial time to conduct a Wellness Check:

1. The foundation has outdated governing documents.
2. The foundation is growing.
3. The foundation has a relationship with a family business.
4. The foundation is transitioning or has transitioned its family leadership or objectives.
5. Compliance concerns.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.