For obvious reasons, US tax law restricts the role that relatives of the founders (called "disqualified persons") of a foundation can play in the foundation. I have two questions:

  1. Would it be legal for a private foundation to pay a disqualified person to provide managerial services that are necessary for the mission?

  2. Would the compensation of the disqualified person apply to the foundation's 5% distribution requirement?

  • 2
    Why haven't you asked a lawyer? They're going to be involved at some point, you may as well pay them once to make the mistake never occur instead of twice to find it and fix it. – Nij Jul 8 '20 at 0:27

Maybe, but maybe not; or, It all depends

As with most questions about private foundations, the answer to your question depends on the details about: a) your specific situation; and, b) how exactly the IRS has interpreted the relevant tax code. To figure out what options you have, and which will work best for you, you need to talk to a tax attorney who has worked with foundations.

That said, it seems to me that the natural way to accomplish your goal is by treating your work as a “direct charitable activity” of the foundation. “Direct charitable activities” are, as the name suggests, charitable activities that the foundation does itself, rather than paying someone else to do. The money used to pay for “direct charitable activities” does count against the distribution requirement.

You really need to talk to a knowledgeable lawyer. In the meantime, you might find this survey of the relevant law, or this survey of what foundations are actually doing, useful.

Talk to an attorney about “direct charitable activities”!

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