Fine Print: Trump Foundation Suit Shines a Light on Compliance Issues That Are Often Overlooked

photo: Irina999petrova/shutterstock

photo: Irina999petrova/shutterstock

Editor's Note: This article is the second in a series looking at the lawsuit against the Trump Foundation, brought by the New York State Attorney General. See all the posts here

I have previously written about the private foundation as one of the philanthropic vehicles available to donors. Many people and families use private foundations to manage their charitable giving. Most of these foundations are informal and are used to donate to other charitable organizations whose mission is attractive to the donors. Their activities are simply taking in money and distributing it to the charitable organizations.

At the same time, it's important to remember that all charitable entities have compliance obligations with the state in which they are formed and operate. For the Trump Foundation, that is New York State. A review of some of the charges leveled against that foundation by New York's attorney general may serve as a wake-up call for those who have private foundations that they have been operating too informally.

The first item mentioned in the lawsuit following a two-year investigation is that the Trump Foundation has no employees and delegated its operations to the accounting office of the Trump Corporation. This corporation supplies “back office” services to several Trump business entities. This is not unusual in the private foundation world. Many people who have private foundations are busy business owners and direct their businesses to take care of the foundation’s day-to-day activities, of which there are often very few. But since the New York AG devoted a paragraph to this situation, you may want to formalize the relationship between your business and your private foundation if the former is operating the latter’s fiscal function.

Next, the suit goes into the New York Not-For-Profit Corporation Law—what is known as the NPC. This law applies to all not-for-profit corporations formed or operating in the state of New York. Section 519 of that law requires the board to present a financial report at the annual meeting and it specifies the content of that annual financial report. The suit notes that the Trump Foundation has not held annual meetings nor had an annual financial report since 1999.

Although the board of the Trump Foundation consists of the president and his two oldest children, who also work together on an near-daily basis, the failure to document an annual meeting and produce an annual financial report is seen as a failure of the board to exercise its fiduciary duties. Has your private foundation documented annual meetings with an annual financial accounting included in that meeting? 

Failing to document annual meetings is also an indication that the board has “not provided oversight and control” of the foundation. In my experience with private foundations, this is a charge that many are open to having leveled against them. When a small board is making all of the decisions for the foundation, the paperwork of documenting that decision-making process frequently slips away. This is a mistake that should be corrected by all immediately and going forward. The old expression that something is not complete until the paperwork is finished is certainly true today.

The suit also mentions the lack of policies at the Trump Foundation. It noted that there are no written criteria for the consideration, approval or monitoring of grants. Many private foundations only consider grants in certain charitable areas of interest. Sometimes, this is written in a grant focus document. Other private foundations do not constrict themselves to one area of interest, and therefore have no written criteria for the grant requests it is willing to consider. Many private foundations do not even solicit grant requests but make grants to charitable entities that have somehow caught the attention of one or more of its board members. Such an unstructured approach to grantmaking is one of the causes for this lawsuit. Where is your private foundation in this regard?

Written criteria for the approval of grants. If you are not even soliciting grants, you’re not likely to have a written policy indicating the criteria for approving (some of) them. Even if you are not publicly soliciting grant requests, if you are famous enough, you will likely receive some unsolicited grant requests. If your unwritten policy is to inform the requesting charity that you do not accept grant requests, that policy probably needs to be in writing.

Grant monitoring. It is assumed that if you are granting money, you have a high level of interest in what has been done with your donation. Therefore, the New York AG assumes that your private foundation should have a written policy for monitoring how your donation was used. On the other hand, many donors only give to charities after performing their due diligence and only make donations to charities with a track record of doing well with their donated resources. You may not have a monitoring program in place as you do not wish to add to the administrative burden of the charities to which you are donating. If that is the case with your private foundation, you should still implement some form of monitoring activity that you document in your files. It may be as simple as reviewing the audit report and Form 990 of the organizations to which you have donated over the past year.

Once your private foundation has these policies in place, you need a protocol for assuring compliance with your policies and your organizing documents—the documents that specified what you intended to do when you formed your private foundation. Failure to have this self-checking mechanism in place is another ding in the New York AG’s review of the Trump Foundation.

I am sure I have described a more formalized private foundation than many of you with private foundations have in place. You may assume that your private foundation is never going to be the subject of a two-year investigation nor be the subject of a lawsuit from the state’s attorney general—and you may be correct. The New York AG says that the Trump Foundation did not have annual meetings since 1999 and admits that the AG's office did nothing about that for 19 years. But circumstances change and it is too late now for the Trump Foundation to get info full compliance with the New York state laws applicable to its operations.

This is just the beginning of what is inside the New York lawsuit against the Trump Foundation. More is coming in my future posts.