Running a foundation means navigating complex regulations, usually without a large staff or a legal team down the hall. And most legal questions don’t look like legal questions at first. They start as ordinary situations: A grantee offers the board tickets to its gala. A trustee joins a grantee’s board. A donor asks whether a fund could be simpler to manage.
We asked Andras Kosaras, counsel at Arnold & Porter and Exponent Philanthropy’s Legal Services partner, which issues members bring to him and his colleagues most often. The 10 areas below cover everything from self-dealing and grantmaking to choosing a legal structure and closing down. For each, you’ll find the questions members actually ask and what to know about each, and an Exponent resource for going deeper. Use it to recognize when a routine decision deserves a call to counsel.
1. Self-Dealing: When Good Intentions Aren’t Enough
No area generates more questions. The rules restrict transactions between a foundation and its disqualified persons: trustees, officers, substantial contributors, their family members, and entities they control. What surprises members is how little room intent leaves them. A transaction can be prohibited even when it’s below market, well-meant, or advantageous to the foundation.
- Can trustees use tickets or other benefits a grantee offers? The general rule turns on who is performing foundation duties. Guests and spouses are treated differently.
- Does putting a donor’s name on a building or fund create a problem? Usually not. This is often treated as an incidental benefit.
- What makes trustee or family compensation defensible? Reasonable compensation for legitimate services is one of the narrow exceptions, which is why comparables matter.
See How to Avoid Self-Dealing for more.
2. Governance: Keeping Your Documents in Step With Your Practice
Many legal questions are really governance questions: what the foundation committed to in writing, and how much room that leaves the board. Bylaws must comply with the law of your state of incorporation, and they drift out of step with actual practice if no one reviews them.
- How do we amend bylaws that no longer reflect how we operate?
- How binding is our donor’s original intent? Some donors set criteria meant to last the foundation’s lifetime; others want the board free to respond to needs no one anticipated.
- What can a committee decide on its own? What authority has the Board delegated to a committee? Board committees can generally act for the board; advisory committees can only recommend.
See The Trustee Handbook for more.
3. Conflicts of Interest: Managing Overlapping Roles
Members often confuse these with self-dealing because there can be financial and non-financial (appearance) conflicts. Non-financial conflicts are common and generally manageable, especially in lean foundations, where trustees are deeply embedded in their communities. The answer is usually process, not avoidance.
- A trustee serves on a grant applicant’s board. What now?
- What belongs in a conflict of interest policy? Disclosure, recusal, and documentation are the core. Federal law doesn’t require a policy, but it’s among the first documents a regulator asks to see.
- When has a conflict crossed into self-dealing? This is the gray area members most often want a lawyer’s read on.
See Policymaking Made Clear: Eleven Foundation Policies Your Board Should Consider for more.
4. Grantmaking: Due Diligence, Grant Structure, and Payout
Legally, a foundation is only required to confirm a grantee’s tax status. But the choices in your guidelines about who’s eligible and how large grants can get are also your first line of compliance.
- How much due diligence is enough for our size and risk tolerance?
- Could a large grant affect a small grantee’s public charity status? “Tipping” catches funders off guard.
- How do PRIs and mission-related investments differ, and how does each interact with our payout?
- What’s required for international grants or grants outside the usual 501(c)(3) universe? These generally call for expenditure responsibility or an equivalency determination.
- What provisions belong in a grant agreement, including for foundations practicing trust-based philanthropy?
See The Foundation Guidebook for more.
5. Supporting Organizations and Fiscal Sponsorship: Knowing Who You’re Really Funding
Both can look like ordinary public charity grants and sometimes aren’t.
- Is this grantee a 509(a)(3) supporting organization? Treatment varies by type, and grantees often can’t identify their own classification.
- Who is the legal grantee when we fund a fiscally sponsored project? It’s the sponsor, not the project, so tax verification, the agreement, and reporting all run through the sponsor.
- What should the sponsorship agreement show? Real discretion, control and oversight by the sponsor, rather than a pass-through arrangement.
See Legal Essentials for Small Foundations for more.
6. Donor-Advised Funds: An Area Where Guidance Is Still Evolving
DAF questions surface when a foundation is spending down, when a donor wants a simpler vehicle alongside the foundation, or when a foundation is asked to grant into one. The statutory rules date to 2006, but IRS guidance is still developing, so this is worth revisiting rather than settling once.
- Can our foundation grant into a DAF, and how does that interact with our 5% distribution requirement?
- What limits apply to benefits flowing back to a donor or advisor? Event tickets and personal pledges come up the same way they do in self-dealing.
- Could a fund we don’t think of as a DAF be treated as one?
See Strategic Uses of Donor Advised Funds for more.
7. Lobbying: What Foundations Can Do on Policy
Members often assume foundations can’t touch policy work at all. Private foundations can’t lobby directly or fund political campaigns, but advocacy isn’t lobbying, and much of what boards want to do falls on the permitted side.
- What’s the difference between advocacy and lobbying?
- Can we make a general operating support grant to an organization that lobbies? Generally yes, and no special restriction is needed in the agreement.
- What applies when we fund a specific project rather than the whole organization? Here the project budget becomes the reference point.
See the Advocacy Field Guide for more.
8. Investments: Prudence, Delegation, and Mission
An investment policy statement isn’t legally required, but it’s where a board documents the decisions it can be held to and assigns responsibility for them.
- Does hiring an outside advisor change our fiduciary duty? Delegating authority doesn’t delegate responsibility.
- What standard applies to our investment choices? No investment is barred outright; the question is whether the board’s process was prudent and documented.
- How do state endowment rules affect what we can spend, and can a donor restriction be modified or released?
- Does mission-aligned or impact investing fit within our obligations?
See Creating a Strategy and Plan for Your Foundation’s Investing: Developing and Using an Investment Policy Statement for more.
9. Corporation or Trust: Choosing Your Legal Structure
New foundations face this first, and occasionally established ones revisit it. Both forms are creatures of state law, so specifics vary, but the trade-off is consistent.
- Which fits us? Trusts are generally simpler to operate, with fewer filing and meeting requirements. Corporations require more formality but are easier to amend and typically offer directors stronger liability protection.
- Can we change structures later? Possible, but complicated enough that it’s worth getting right at the start.
See How to Start a Private Foundation for more.
10. Spenddown and Dissolution: Closing a Foundation the Right Way
At the other end of the life cycle, closing is a sequence of decisions rather than one, and each has a legal dimension.
- Do our governing documents permit a spenddown plan?
- What are the options for moving assets out, and what does each require?
- What do IRS termination rules and our state’s dissolution requirements ask of us?
See Closing Shop: When Small Foundations Get Out of the Foundation Business for more.
Get Trusted Legal Guidance When Your Foundation Needs It
Exponent members can add Legal Services to their organizational membership for up to 10 hours of consultation each year with attorneys at Arnold & Porter who specialize in foundation and nonprofit law.
Want to learn more? Watch our Legal Services webinar to hear directly from Andras Kosaras about the service, the types of questions members bring to the Arnold & Porter team, and how to make the most of your 10 hours.
Ready to add Legal Services? Contact your Member Concierge Team. Not yet a member? Legal Services can be added when you join Exponent Philanthropy.
This resource is provided for educational purposes and does not constitute legal advice. Foundations should consult qualified legal counsel about their specific circumstances.
