Can a Foundation Lawyer Serve as a Foundation Trustee?
This article explores one of the more common questions about conflicts of interest: May the foundation's lawyer serve as a trustee?
Often, the lawyer who drafted a foundation's organizing documents stays on as counsel to the organization. He or she may be asked to serve on the grantmaker's board as well. Is this permissible? May he or she participate in all decisions the board makes? May the lawyer be paid for the time that he or she devotes to board meetings and other legal work for the foundation and, if so, may the compensation be at the rates customarily charged by his or her law firm? Does it matter whether the grantmaker is a private foundation or a public charity?
The foundation's lawyer may serve as a trustee or director of the organization—be it a public charity or a private foundation. However, a lawyer/board member should not participate in decisions relating to the retention or compensation of his or her law firm. The board should decide in advance whether the lawyer must recuse himself or herself from all discussion of those questions or only from the final vote. Otherwise, a lawyer/board member may participate in all of the board's decisions.
Like any other board member, the lawyer/trustee should disclose any outside involvements that may give rise to conflicts. For example, if he or she (or the law firm in which he or she is a partner) represents charities that are potential grantees of the foundation, this fact should be disclosed. There is no bar on the foundation making a grant to those organizations, but the lawyer/trustee should probably recuse himself or herself from any decisions related to those grants.
The rules on compensating a lawyer/trustee are the same as those applying to many individuals whom a grantmaker pays. If the entity is a private foundation, the lawyer/trustee is a "disqualified person,” the label the Tax Code uses to describe major donors to the foundation, foundation directors, family members of both of those groups and businesses in which they are large stakeholders.
Disqualified persons may be compensated only for personal services that are reasonable and necessary to the foundation's work and the compensation may not be excessive. Legal services (along with investment management services) are expressly included in the definition of personal services in the Internal Revenue Service's (IRS) private foundation regulations.
Assuming the lawyer's services are necessary, what's a rate of compensation that's not excessive? The IRS's position is that the amount
similarly situated people are paid for similar work will be considered reasonable compensation. If the attorney's law firm customarily bills clients similar to the foundation at the rates it proposes to charge the foundation, this may serve as evidence of the reasonableness of the rates. Ideally, a foundation would periodically compare the rates it pays with other similarly sized foundations or put its legal work out for bid.
If the trustees of a private foundation are compensated for their service, may the lawyer/trustee receive both legal fees and trustee fees? Strictly speaking, as long as all of the services are necessary and the total compensation package is reasonable, such payments will be permissible. However, if the lawyer is already charging the foundation for his or her time, foundation managers must ensure that legal fees are limited to services above and beyond those customarily performed by trustees to prevent double dipping.
Rules for Public Charities
If the grantmaker is a public charity, such as a community foundation, the relevant legal rules on compensation for a lawyer/trustee come from the Tax Code's intermediate sanctions provisions. For more information on intermediate sanctions, see the Intermediate Sanctions Checklist.
Intermediate sanctions rules penalize excess benefit transactions, in which charity insiders (such as directors) receive more value from an organization than they have provided to it. Charities must pay no more than fair market value for services provided by insiders. They may establish a rebuttable presumption that the lawyer/trustee's compensation meets this standard by having an independent committee consider data on comparative rates and approve the compensation, being sure to fully document this determination. Some community foundations put their legal work out for competitive bids periodically as well.
Other Conflicts, Other Rules
Sometimes, the lawyer/trustee may face a conflict between his or her role as a trustee and as the counsel for the foundation. These situations often will be governed by the state's code of ethics for lawyers. If the board's actions are an issue in a lawsuit, for example, the lawyer/trustee may not be able to serve as counsel in the litigation. This might be the case if the state attorney general brings an action against the foundation's board for mismanagement of its assets or if a foundation employee sues the board for employment discrimination. A lawyer/trustee might also find himself unable to represent the foundation if one faction of board members takes another to court.
Particularly in the community foundation context, lawyer/trustees may find themselves on both sides of a gift. For example, a lawyer who serves as counsel and trustee of a local community foundation may have a client with a complicated asset that she wishes to give to a charity. If the client chooses the community foundation, the lawyer may have a conflict between his duty to help his client achieve her goals and his duty to help the community foundation consider fully the implications of accepting this particular gift. (Note that this conflict arises whether or not the community foundation's counsel sits on the charity's board; it's simply made more acute because the board is ultimately charged with accepting or rejecting gifts.) In this situation, the lawyer must disclose his dual loyalties. The wisest course for the board is to bring in another
advisor to counsel them on the consequences of accepting the asset.
An attorney or law firm that has been with the foundation since its inception can be a marvelous resource, a repository of institutional memory, an ethical compass and a source of objective opinions. Having this voice of authority on the board can be enormously helpful. But foundation managers need to remember that their trusted attorney needs to be treated a little differently from other board members.