Yes, a family member may be hired to staff the foundation under guidelines based on reasonable services and reasonable compensation. And, in fact, for many family foundations, the first paid staff member is likely to be a family member.
First, consult your foundation’s governing documents (bylaws, trust agreement, etc.). Do they permit paying a family member for service to the foundation? In addition, you must check to see if your state has regulations pertaining to paying family members, as they do in California.
If neither your governing documents nor your state prohibits payment to a family member, you can proceed to the next step. You must determine whether the services are reasonable and necessary and whether the compensation is reasonable.
The first portion of this statement demands that the services be reasonable and necessary to carry out the tax-exempt purposes of the foundation. Under this test, the work must further the foundation’s charitable purposes; the person holding this position must be qualified to perform these services; and the extent of services must be reasonable for your particular foundation. Does the position require a full-time executive director, or would a part-time position be more appropriate, given the number of grants awarded and meetings held?
Secondly, the compensation must also be reasonable. A fair basis of comparison is what other foundations of similar size and nature pay their officers or staff in like positions. See Exponent Philanthropy’s Foundation Operations and Management Survey which lists salaries of CEOs and other paid staff, segmented by foundation size and location.
Two final factors to remember: The IRS is more impressed with compensation decisions that are documented in detail at the time that they are made, rather than justified at the time that they are challenged. Also, remember that that amount paid to a director is a matter of public record, disclosed on the foundation’s annual tax returns, and available to anyone who asks to see it.