Please clarify what "excess benefits" and “disqualified persons” are for a public charity seeking to pay a grandson in-law of the founder $1500 dollars per year? Our foundation is set up where the grandson in-law has no "substantial" influence over the governance. Our by-laws state we must have one more non-family member than family members. Our Founder died more than 25 years ago and this person has given no money to the foundation. Why can't they get paid? If we consider them a contract employee, can we pay them?
You are correct to be concerned that a public charity may not pay excessive compensation to a “disqualified person” with respect to the charity. You are also correct that a “disqualified person” includes a person who has been a position to exercise substantial influence over the charity in the last five years and certain family members (including lineal descendants, siblings, and their spouses) of those who are or have been in position to exercise substantial influence within the period. The Treasury Regulations (§53.4958-3) also state that anyone who is a voting member of the governing body or a top officer of the organization is by virtue of that position deemed to be in a position to exercise substantial influence over the organization, whether the person exercises that power or not. Therefore, your grandson in-law doesn’t have to look back to the founder, but may be directly a disqualified person if he serves on the board or is a family member of a person who is or was a director or top officer within the last five years. (The rules for determining a “disqualified person” of a private foundation are slightly different from those for a public charity, which only makes the situation and the language we use a little more confusing.)
Being a disqualified person, however, does not mean that he can’t be paid. He can be paid reasonable compensation for services actually rendered. Whether he is paid as an employee or as a contractor makes no difference; the amount must be reasonable in return for the work. The Treasury Regulations provide a “safe harbor” provision by which to set compensation of a disqualified person so that the organization and the disqualified person have a “rebuttable presumption” that the compensation is reasonable. (See Ready Reference Page: “Charities Must Avoid Excess Benefit Transactions.”). But if he does anything more than add his family name to your letterhead, $1500 a year is not apt to be deemed unreasonable.