Can my charitable dollars be used to help individuals?

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. Indeed, it’s not uncommon for clients to tell their attorneys, CPAs, and financial advisors that they want their charitable dollars to help “real people,” not just institutions.

This instinct makes sense—but grants designated to individuals live in a carefully regulated corner of the tax law because they sit right at the intersection of generosity and private benefit. 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—repeatedly—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, these 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.

Public charities, including Fairfield County’s Community Foundation, have more flexibility—but not a free pass. While the community foundation is 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 rather than specific insiders, including individual assistance programs that are thoughtfully designed and carefully administered.

At FCCF, whether grants to individuals are permissible depends largely on the type of fund involved. Unrestricted funds and field-of-interest funds are often well-suited for individual assistance programs because the community foundation itself oversees the program’s design, selection process, and oversight. Scholarship funds are a familiar example and are frequently structured to mirror the procedural protections found in private foundation regulations—even though FCCF is a public charity, not a private foundation.

Here’s what’s super important: 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.

Yes, this is complex! Here are three 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.
• FCCF offers Scholarship funds that permit grants to individuals, and our team is happy to help.

We are honored to be your first call anytime the topic of charitable giving arises. Contact Joe Collin, VP of Philanthropy, at JCollin@FCCFoundation.org or call (203) 750-3200.