Can charitable dollars go to support individuals?
A message from the CICF Collaborative, including Central Indiana Community Foundation, Hamilton County Community Foundation, IMPACT Central Indiana, the Indianapolis Foundation, and Women’s Fund of Central Indiana
At the CICF Collaborative, one of the most common questions we field from donors and their advisors is whether charitable funds can be distributed directly to specific people in need as opposed to larger organizations.
This instinct makes sense, but as you’d expect, grants to individuals live in a carefully regulated corner of tax law. In general, the Internal Revenue Code allows charities to help individuals only when the assistance serves a legitimate charitable class and is structured to avoid private inurement or impermissible private benefit.
No matter the type of charity involved, the baseline rules are consistent: the activity must further charitable purposes under Section 501(c)(3), use objective and nondiscriminatory selection criteria, and include safeguards to ensure funds are actually used for charitable ends. The IRS has made clear that when individuals are involved, the margin for error is smaller and the process matters even more.
Recent private letter rulings have reinforced that for private foundations, the rules are especially strict. Under Internal Revenue Code Section 4945, grants to individuals are treated as taxable expenditures unless a specific exception applies. Examples of exceptions include scholarships, fellowships, educational loans, and certain disaster relief programs (so long as processes were in place beforehand).
Public charities, including the CICF Collaborative, have more flexibility—but not a free pass. While we are not subject to excise taxes under Section 4945, grants to individuals are still analyzed under the operational test in Section 501(c)(3) and the private benefit doctrine. The IRS has long acknowledged that public charities can provide direct assistance to individuals for purposes like need-based aid, disaster relief, education, emergency hardship, or health-related support, as long as the recipients are chosen using objective criteria and the program benefits a charitable class.
Here’s an important detail: Donor-advised funds are different. They are subject to additional statutory rules under Internal Revenue Code Sections 4966 and 4967, and the IRS has consistently warned that donor involvement in selecting individual recipients can raise serious prohibited benefit concerns.
Like anything to do with the IRS, it gets complex! Here are three general takeaways:
- The IRS is remarkably consistent that grants to individuals can absolutely be a legitimate charitable activity, but only when they are structured with care, transparency, and institutional control from the outset.
- The IRS’s recent focus on procedural rigor shows that compliance problems usually stem from informality or misunderstanding, not bad faith.
- The community foundation is happy to help navigate these unique giving situations. We are honored to be your first call anytime the topic of charitable giving arises.
Thank you for the opportunity to work together, and thank you for rolling with a technical but important topic!
About the CICF Collaborative
CICF Collaborative is a partnership of philanthropic organizations working together to strengthen communities across the region. Each entity within the CICF Collaborative (including the cornerstone entities, Central Indiana Community Foundation, Hamilton County Community Foundation, IMPACT Central Indiana, the Indianapolis Foundation, and Women’s Fund of Central Indiana) brings deep knowledge, strong relationships, and its own individual, focused mission. The CICF Collaborative unites the entities by providing shared services, allowing the entities to operate more efficiently and effectively. By leveraging what we each do best, we’re able to better serve our communities and create more lasting impact, together. Learn more »