Pitfalls of Personal Pledges

A Foundation Can Make a Grant but Can’t Cover a Pledge

The founders and board members of private foundations often take an active role in their communities, working closely with local charities, hospitals, universities, and cultural institutions. When these individuals enter into pledge agreements with these organizations as a means of raising funds for significant projects (and to attract other donors by taking the lead), the distinction between a personal pledge and a pledge made on behalf of the foundation is of critical importance.

Although a private foundation may make charitable grants, its satisfaction of the personal obligation of a foundation insider, or disqualified person,1 is problematic. A disqualified person is not permitted to derive a tangible economic benefit from his or her dealings with the foundation. To the extent that the foundation relieves a disqualified person of a financial obligation, that person is considered to have benefitted, leading to adverse tax consequences.

This paper will discuss the conditions that can lead to such consequences and offers some helpful tips and suggestions as to how foundations can avoid some of the potential pitfalls surrounding charitable pledges.

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