We get this question in one form or another often and the answer is generally yes, although with some limitations.  Assuming that the organization is not recognized as an organization that makes grants to individuals in need, grants to individuals do not really fit within the purpose for which it is exempt.  Yet a charity may make grants to needy individuals as a charitable activity and the IRS is unlikely to challenge an occasional gift to a needy family.  Even if it weren’t deemed charitable activity, a charity can carry on a limited amount of non-charitable activity without jeopardizing its status so long as it is not substantial.  Therefore, even in the worst case, a small gift to a needy family should not jeopardize exempt status.  A really large gift that would be considered a substantial activity of the organization might bring IRS scrutiny.

But when you say you are making the grants to “members,” the IRS could treat a series of grants that are limited to grants to members as a type of private benefit to a limited group of insiders. The IRS might treat this quite differently from a series of gifts to unrelated individuals or families. In either case, if you are anticipating more than an isolated gift or two of this type, I would recommend that you tell the IRS what you are doing by reporting it as a new activity on your tax return.

You should also be sure that you do not suggest that someone who gives money to your organization in order to help a specific family is able to claim a charitable contribution deduction for the donation.  A gift to, or earmarked for, the benefit of a specific individual or family is not deductible by an individual because individuals cannot claim a charitable contribution deduction unless they give to a qualifying entity.  Even if a donor contributes to a charity’s fundraiser, if the fundraiser is for the benefit of a specific family, the donor is considered to have made the gift directly to the family because it is earmarked for the family.