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.

Footnotes

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).

Read the full newsletter here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions