Grants Management & Administration for Private Foundations
Making a grant can seem simple.
The board approves funding for a nonprofit doing important work. The foundation sends the money. The nonprofit puts it to use.
But for a private or family foundation, there is quite a bit happening between “we want to fund this organization” and “the grant is complete.”
Effective grants management and administration connects a foundation's charitable decisions with its governance, accounting, payments, documentation, tax compliance, and financial reporting.
For leanly staffed foundations, keeping all those pieces connected can become challenging as grantmaking grows.
What Is Grants Management?
Grants management is the process used to administer a foundation's grantmaking from initial consideration through approval, payment, monitoring, reporting, and eventual closeout.
At any point, a foundation should ideally be able to answer:
What grants are being considered?
What has been approved?
What has actually been paid?
Has appropriate due diligence been completed?
Are there outstanding reports or other requirements?
Do the grant records agree with the accounting records?
For a foundation making a handful of straightforward grants, spreadsheets, emails, and board minutes may initially seem sufficient.
As the number or complexity of grants increases, however, a more structured process can become important.
Why Grants Administration Matters for Private Foundations
For private foundations, grants administration is not simply about staying organized. It can also be an important part of the foundation's compliance infrastructure.
That is because not every grant is treated the same way under the private-foundation rules.
For example, many ordinary charitable grants to qualifying U.S. public charities do not require the foundation to exercise expenditure responsibility. Special rules, however, apply to certain supporting organizations and other recipients.
That makes identifying who is receiving the grant and what rules apply before the money is sent an important part of grants administration.
When Grants Become More Complex
Some grants require more attention than the typical domestic grant to an established public charity.
International Grants
Private foundations can make grants to foreign organizations, but additional analysis may be necessary.
If a foreign organization has not already been recognized by the IRS as a qualifying public charity, a foundation may consider obtaining an equivalency determination or exercising expenditure responsibility, depending on the circumstances.
Under IRS rules, an equivalency determination generally relies on current written advice from a qualified tax practitioner, such as an attorney, CPA, or enrolled agent. In practice, foundations may obtain equivalency determinations through specialized services such as NGOsource, which provides a centralized process and repository for these determinations.
When expenditure responsibility is required, the foundation must establish procedures designed to ensure that the grant is used for its intended purpose, obtain full and complete reports from the grantee on how the funds are spent, and report the required information to the IRS.
The practical lesson is simple: international grants should be identified as such early in the process rather than treated exactly like routine domestic grants.
Grants to Individuals
Certain grants directly to individuals can also be subject to additional rules.
Private-foundation grants to individuals for travel, study, or similar purposes, including many scholarships and fellowships, can fall under Internal Revenue Code Section 4945(g). Applicable grantmaking procedures generally require advance IRS approval and must satisfy requirements concerning matters such as selection and supervision.
Again, this does not mean private foundations cannot make these grants. It means the administrative process needs to reflect the type of grant being made.
Where Grants Management Meets the 5% Rule
Grants administration also intersects with the annual distribution requirement applicable to private nonoperating foundations, commonly referred to as the 5% rule.
The actual calculation is more nuanced than simply taking 5% of a foundation's year-end investment portfolio, as is explained in my blog post entitled “The 5% Rule for Private Foundations: A Closer Look”. In general, the minimum investment return is based on 5% of the net value of the foundation's noncharitable-use assets, subject to the detailed adjustments and valuation rules contained in Form 990-PF.
From a grants-management perspective, however, one distinction is particularly important:
A grant being approved is not necessarily the same as making a qualifying distribution.
Qualifying distributions are generally determined based on cash out of the door, rather than when the grant is approved.
For foundations with multiyear commitments or substantial year-end grantmaking, accurately distinguishing between approved grants and amounts actually paid is therefore important.
This is one reason grants management and accounting should work together rather than operate as separate processes.
The Form 990-PF Connection
The foundation's grant records also become important when preparing annual Form 990-PF tax return.
For foundations completing the applicable grant schedules, Form 990-PF calls for information including the recipient, foundation status, purpose of the grant, and amount. The return also distinguishes between grants paid during the year and certain grants approved for future payment.
Ideally, this information should already be readily available.
Otherwise, year-end preparation can become an exercise in reconstructing the foundation's grantmaking from board minutes, emails, bank transactions, accounting records, and spreadsheets.
Good grants administration helps prevent that.
What Does Effective Grants Administration Look Like?
A foundation does not necessarily need a large grants department or an expensive technology platform. It needs a reliable process.
Good grants administration should provide confidence that:
Appropriate review has taken place.
Grant approvals are properly documented.
Payments are accurate and timely.
Outstanding requirements are known.
Grant records and accounting records agree.
Information needed for financial and tax reporting is readily available.
The appropriate system will depend on the size and complexity of the foundation. What works for a family foundation making twenty grants per year may look very different from the system required by a foundation making several hundred.
The important point is that the administrative infrastructure should grow with the foundation's grantmaking.
Supporting the Work Behind the Grantmaking
The grant itself is the visible part of philanthropy.
Behind it is the less visible work required to make sure the grant is appropriately reviewed, approved, documented, paid, tracked, accounted for, and reported.
For a leanly staffed private or family foundation, managing all of those responsibilities internally can consume significant time and capacity, particularly as grantmaking becomes more active or complex.
Ally Foundation Services provides grants administrative and compliance support to private and family foundations, working alongside foundation staff, boards, accountants, tax preparers, legal counsel, and other advisors.
Outsourced support can provide additional administrative capacity while helping create a more consistent connection between a foundation's grantmaking, accounting, and compliance functions.
This article is provided for informational purposes only and does not constitute legal, tax, or financial advice. Foundations should consult their legal and tax advisors regarding requirements applicable to their specific circumstances.