United States: Lessons Learned From The Disgraceful Downfall Of The Trump Foundation: Top Dos And Don'ts For Private Foundations

Last Updated: April 4 2019
Article by James P. Joseph and Dana O. Campos

The New York Attorney General's (AG) two-year investigation and ongoing enforcement action against the Donald J. Trump Foundation (the Trump Foundation or Foundation) has resulted in the organization's widely publicized downfall. Most recently, the Trump Foundation agreed to dissolve and distribute its remaining assets under the supervision of a court. Now, the New York AG's office is seeking to recover $2.8 million in restitution, plus additional penalties, due to the organization's "shocking pattern of illegality," which included, among other things, the Foundation's unlawful coordination with Mr. Trump's 2016 presidential campaign, and the Foundation "functioning as little more than a checkbook to serve Mr. Trump's business and political interests."1

At the core of the New York AG's case are the serious allegations and findings that the directors and officers of the Trump Foundation consistently put their own, personal self-interests ahead of the interests of the organization. The New York AG's investigation found that the Foundation's board willfully participated in several self-dealing transactions, with its directors acting with a complete disregard to their fiduciary duties, which were owed to the organization. The New York AG says that this "pattern of persistent illegal conduct" by the Trump Foundation's board and officers, resulted in the organization's failure to satisfy even the most basic legal requirements needed to function within its lawful purposes under IRC §501(c)(3).2

Because of the severity and gravity of the many illegal wrongdoings by the Trump Foundation's officers and directors, the New York AG is still seeking to enjoin Mr. Trump and his children from serving as a director of any New York nonprofit for up to ten years.3 This is a significant personal penalty to bring against the Trump family, and one, that if successful, would leave Mr. Trump "in the unusual [and embarrassing] position of not being able to serve on the board of his own post-presidential foundation, should it be set up in New York."4

While the Trump Foundation's legal woes remain ongoing, we can already see the real consequences and steep penalties that can result from a board's poor governance and oversight of a nonprofit organization. Below are the top dos and don'ts for running your own private foundation, learned from the illegal and other egregious errors that led to the Trump Foundation's termination.

Don't Do

Use the charity to advance the self-interest of its executives or directors.
The New York AG found that, throughout its lifetime, the Trump Foundation functioned as little more than a checkbook for payments from Mr. Trump or his businesses to nonprofits, regardless of their purpose or legality.5 In fact, the Trump Foundation's board of directors never established a policy or criteria for choosing grant recipients or voted to approve a grant, but rather they allowed Mr. Trump alone to make all decisions related to the Foundation and its giving.6 This self-serving use of the Foundation's funds led the New York AG to find that the Trump Foundation had engaged in a grossly illegal misuse of charitable funds.

Act in furtherance of the foundation's charitable purposes and mission, and annually payout 5 percent of the foundation's assets to qualified charities.
A private foundation must spend at least 5 percent of its assets each year by supporting eligible public charities. Foundations should set up internal processes to carefully review all potential grantees, and closely monitor the use of all grant funds. Establishing a formal process, approved by the foundation's board, for approving grants is also a best practice.

Don't Do

Engage in self-dealing.
The Trump Foundation entered into at least five self-dealing transactions that "directly benefited Mr. Trump or the entities that he controlled."7 Some examples included: the Trump Foundation purchasing a $10,000 portrait of Mr. Trump to display at one of his golf clubs; Mr. Trump directing the Trump Foundation to give $100,000 to another charity in order to settle his personal legal dispute involving his Mar-a-Largo resort; and $158,000 payment by the Trump Foundation to settle legal claims brought against Mr. Trump's National Golf Club.8

Establish clear guidelines and internal procedures to ensure the foundation does not engage in any self-dealing transactions.
Private foundations are strictly prohibited from engaging in any self-dealing transactions. A few examples of prohibited transactions include, but are not limited to, the following: the sale, exchange, or leasing of property with disqualified persons; lending money or credit to a disqualified person; making grants to organizations that employ family members; accepting tickets to fundraisers or performances; making reimbursements for child care expenses; paying salaries and fees to family members; and commingling the foundation's investments and funds with the funds of its directors, officers, or donors.9

Don't Do

Use foundation funds for lobbying or political activities.
The New York AG found that the Trump Foundation illegally raised millions of dollars that were later used in a manner designed to influence the 2016 presidential election and support Mr. Trump's presidential campaign.10 One such example of this illegal behavior was the Trump Campaign directing and coordinating an Iowa fundraiser for the Foundation in 2016. According to the AG's petition, after the fundraiser, the Trump Foundation "ceded control over the charitable funds it raised to senior Trump campaign staff, who dictated the manner in which the Foundation would disburse those proceeds, directing the timing, amounts and recipients of the grants."11

Familiarize yourself with federal, state, and local lobbying rules to ensure the private foundation refrains from engaging in all prohibited political and lobbying activities.
Foundation directors, officers, and staff should work with experts to understand the various definitions of lobbying and political activities under IRS, FEC, and state laws and should be trained in the activities that the foundation can and cannot support with its resources (financial or otherwise). Foundations should be aware that many activities that promote (or oppose) specific policy initiatives, including legislation, and that provide voter education are permissible.

Don't Do

Skip annual board meetings.
The New York AG's investigation found that the Trump Foundation's board never approved any of its expenditures or activities. Alarmingly, the investigation also found that the board existed in name only, having not met since 1999.12

Hold at least one board meeting annually, and require the foundation's board to periodically review and approves all of the foundation's expenditures and activities.
A nonprofit organization is required to host an annual board meeting, but many boards choose to meet more frequently to provide the necessary leadership, accountability, and governance for the nonprofit to meet its charitable mission. A best practice is to meet at least three or four times a year.

Don't Do

Assume your foundation is immune from making errors or unintentionally engaging in illegal activities.
During the investigation into the Trump Foundation, the New York AG discovered that the organization had made many errors in its giving, including illegally sending a $25,000 check to a political action committee for Florida's attorney general.13 Although the Trump Foundation tried to refute this claim (and others) as an unintentional clerical error by its staff, the organization was still on the hook for violating a number of state and federal rules that prohibited the private foundation from engaging in lobbying and political activities.

Create internal and external review processes to prevent and catch clerical errors and intentional (or unintentional) illegal activities taken by the foundation's staff, board, or officers.
Private foundations should work with external experts and auditors to ensure that all foundation funds are being appropriately allocated to legal donees, and being kept separate from the personal and business accounts of directors, officers, donors, and staff.

Don't Do

Lie in any filing to the IRS (or other regulatory agency) about the foundation's activities, assets, or involvement with other groups and organizations.
Mr. Trump has come under fire for annually affirming to the IRS in the Trump Foundation's Form 990-PF that his Foundation was not engaging in any political activity or self-dealing transactions - statements which have now proven to be untrue.14

Work with financial and legal experts to correctly file all required paperwork to the IRS on an annual basis, and confirm the foundation's board of directors understands and affirms all statements as true before they sign any legal forms on behalf of the foundation.
Private foundations are required to annually file a Form 990-PF to the IRS, which should be reviewed by the board and must be signed by an officer of the organization. The signatory of the form signs the annual IRS form under the penalty of perjury, and must confirm that all statements and materials filed with the form are true and correct.

Don't Do

Solicit funds, unless you are already registered with a state charity bureau to do so.
The New York AG's investigation found that the Trump Foundation was largely funded by people other than Mr. Trump. In fact, Mr. Trump stopped giving his own money to the Foundation in 2008, forcing the organization to rely solely on the outside donors for nearly a decade.15 The New York AG issued a notice of violation to the Trump Foundation for not being registered to solicit contributions in the State of New York, despite the fact that the Foundation was engaged in fundraising activities for nearly a decade.16

Work with counsel to confirm that you are abiding by all local laws and rules, including required state registration to solicit funds within that state.
Typically, private foundations do not need to register to do fundraising with a state's charity bureau because they are not likely to be soliciting funds from outside donors. However, if the foundation intends to do any fundraising in a state, then it should check the register requirements to see if it must register with the state charity bureau or other state agency before soliciting funds.


1 Press Release, New York State Office of the Attorney General, Letitia James, A.G. Underwood Announces Stipulation Dissolving Trump Foundation Under Judicial Supervision, With AG Review of Recipient Charities; AG Underwood's Lawsuit Remains Ongoing (Dec. 18, 2018) (quoting Attorney General Barbara D. Underwood); see also New York v. Trump et al., case no. 451130/2018, in the Supreme Court of the State of New York, County of New York.

2 M. Peregrine, Corporate Law & Governance Update: January 2019, The National Law Review (Jan. 20, 2019).

3 S. Goldmacher, Trump Foundation Will Dissolve, Accused of 'Shocking Pattern of Illegality', NY Times (Dec. 18, 2018); E. Orden, Trump Foundation Says NY AG's Comments Show Lawsuit is Political, CNN (Feb. 11, 2019). See also M. Peregrine, Corporate Law & Governance Update: January 2019, The National Law Review (Jan. 20, 2019), ("A November 23, 2018, decision sustained all but one of the causes of action (relating to a preliminary injunction), and the parties entered into a stipulation relating to the dissolution of the foundation on December 19, 2018. According to published reports, the attorney general continues to pursue foundation officers and directors (the president and his children) on the fiduciary breach, waste of assets and related allegations.").

4 S. Goldmacher, Trump Foundation Will Dissolve Accused of 'Shocking Pattern of Illegality', NY Times (Dec. 18, 2018).

5 Press Release, New York Attorney General, Letitia James, Attorney General Underwood Announces Lawsuit Against Donald J. Trump Foundation And Its Board Of Directors For Extensive And Persistent Violations Of State And Federal Law (Jun. 14, 2018).

6 Press Release, New York Attorney General, Letitia James, Attorney General Underwood Announces Lawsuit Against Donald J. Trump Foundation And Its Board Of Directors For Extensive And Persistent Violations Of State And Federal Law (Jun. 14, 2018).

7 S. Goldmacher, Trump Foundation Will Dissolve, Accused of 'Shocking Pattern of Illegality',NY Times (Dec. 18, 2018).

8 Press Release, New York Attorney General, Letitia James, Attorney General Underwood Announces Lawsuit Against Donald J. Trump Foundation And Its Board Of Directors For Extensive And Persistent Violations Of State And Federal Law (Jun. 14, 2018).

9 B. White, Avoiding Conflicts of Interest and Self-Dealing for Family Foundation Boards, National Center for Family Philanthropy (May 2013).

10 Press Release, New York Attorney General, Letitia James, Attorney General Underwood Announces Lawsuit Against Donald J. Trump Foundation And Its Board Of Directors For Extensive And Persistent Violations Of State And Federal Law (Jun. 14, 2018); T. Snell, Think the Trump Foundation Case is Over? Think Again., CNN (Dec. 19, 2018).

11 New York v. Trump et. al., case no. 451130/2018, Supreme Court of the State of New York, County of New York (Manhattan), Petitioner's Verified Petition (as filed June 14, 2018) at 13.

12 Press Release, New York Attorney General, Letitia James, Attorney General Underwood Announces Lawsuit Against Donald J. Trump Foundation And Its Board Of Directors For Extensive And Persistent Violations Of State And Federal Law (Jun. 14, 2018).

13 A. Ebeling, Foolproof Foundations: How to Stay on the Right Side of the IRS, Forbes (Dec. 14, 2016).

14 S. Goldmacher, Trump Foundation Will Dissolve, Accused of 'Shocking Pattern of Illegality', NY Times (Dec. 18, 2018).

15 S. Goldmacher, Trump Foundation Will Dissolve, Accused of 'Shocking Pattern of Illegality', NY Times (Dec. 18, 2018); D. Fahrenthold, Trump Boasts About His Philanthropy. But his Giving Falls Short of His Words., Wash. Post (Oct. 29, 2016).

16 A. Ebeling, 10 Private Foundation Do's and Don'ts, Forbes (Dec. 14, 2016).

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