In general, the Internal Revenue Code allows nonprofits 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 organizations involved, the activity should further charitable giving purposes under Section 501(c)(3), use objective and nondiscriminatory selection criteria and include safeguards to ensure funds are used for charitable ends.

The IRS has made clear that when individuals are involved, the margin for error is smaller, and the process matters just as much as the intent.

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 — but only if the foundation has obtained advance IRS approval of its grant procedures and if the procedures were in place before grants were made. Good intentions alone do not carry much weight here.

Nonprofit organizations, including the Foundation, have more flexibility. 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 nonprofits 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 rather than specific insiders. This includes individual assistance programs that are thoughtfully designed and carefully administered.

When it comes to donor advised funds, they are subject to additional statutory rules under Internal Revenue Code Sections 4966 and 4967. The IRS consistently warns that donor involvement in selecting individual recipients can raise serious prohibited benefit concerns.