19 February 2020 - Article
When making charitable gifts to cultural institutions, donors should consider whether they are motivated by increasing the donee institution's financial health, ensuring the gift remains in the public sector, maximizing their own tax benefi ts, or a combination thereof.
Clarifying charitable intent is particularly important now as cultural institutions face increasing fi nancial pressure and consider deaccessioning, the practice by which a cultural institution formally transfers its ownership of an object to another institution or individual by sale, exchange or grant, or disposes of an object if its physical condition is so poor that it has no aesthetic or academic value.
Recent press regarding deaccessioning has raised some concerns among donors that their past or contemplated future donations could be sold by the donee institution. These concerns should not discourage charitable gifting, but should instead encourage donors to articulate their intentions with donee institutions and in clearly drafted gift agreements and testamentary instruments.
Donors primarily concerned with a donee institution's financial health should draft documents that provide the institution with the greatest flexibility with respect to the gift. Donors should consider whether they are comfortable with the donee institution selling a gift for any reason allowable under an institution's deaccessioning policy and any applicable laws, including for the payment of operating expenses. Some donors may want to state that the proceeds of deaccessioned works may only be used to improve the quality, scope and appropriateness of the donee's collection and to support the mission and long-term goals of the institution.
Donors concerned that their gift remains in the public sector will not be comfortable with such language. Unfortunately, some donors assume there is an understanding between themselves and the donee institution to retain gifts in perpetuity. Because institutional personnel and collection management policies shift over time, donors should ensure that their intentions are clearly stated. Ideally, the donor would state that the gift is conditioned on the donee institution not deaccessioning the gift in the future. Unfortunately, most institutions will not accept such a restriction. In fact, many institutions will want the donor to sign a boilerplate agreement which states that the institution will retain all right and title to the donated object, including the right to sell the item in the future (subject to the institution's deaccessioning policy or any applicable laws). The institution is, however, more likely to accept the gift if the agreement contains a proviso that if, in the future, the institution electsto deaccession the donor's gift, it must donate the gift to another institution.
With respect to any restrictions on gifts, donors will have more negotiating power depending on the importance of the donated work and the relationship between the donor and the cultural institution. If a donor insists on certain restrictions, he or she may have to discuss the gift with several institutions before one agrees to the restrictions.
If a donor is motivated by tax benefi ts, in the US it is important that any gift restrictions are also compliant with the Internal Revenue Code. If an object is bequeathed to a cultural institution through a testamentary instrument, the Internal Revenue Code states that the entire value of the object is included in the estate and there is an offsetting deduction in the amount of the charitable transfer. Any restrictions placed on the gift create a potential risk that the value of the object in the hands of the cultural institution is less than its fair market value in the hands of the estate, thereby decreasing the estate's deduction to the lesser amount. Generally, IRS private letter rulings suggest that absolute limitations on a cultural institution's ability to dispose of an object could trigger an IRS valuation. In the letter rulings in which the IRS allowed a full charitable deduction, the IRS found of particular importance the ability of the museum to sell or loan the collection.
If a US donor makes a lifetime gift, it will be removed from the donor's estate and the donor will receive an income tax charitable deduction on the transfer in the year of the gift. If the IRS requires a valuation due to restrictions placed on the gift, the valuation will affect the income tax charitable deduction. As with testamentary transfers, as long as the cultural institution is not prohibited from resale, the value of the deduction for income tax purposes should not be reduced by reference to such restriction. Whether a gift is made during lifetime or at death, to ensure a charitable deduction, the US donor should avoid retaining any right to receive an interest in the object in the future (a “reversionary interest”). The gift agreement should vest any remaining interest, in the event of default, in a different charitable organization.
US donors should also keep in mind the “Related Use” rule when making tax motivated gifts. Artwork drafted by assemblyman Richard L. Brodsky, the State Board of Regents and the Museum Association of New York (commonly referred to as the ‘Brodsky Bill') would only permit a regulated institution to deaccession and dispose of a collection item under the following circumstances:
- the item is inconsistent with the institution's mission statement
- the item has failed to retain its identity
- the item is redundant
- the item's preservation and conservation needs are beyond the capacity of the collecting institution to provide
deaccessioning the item would accomplish ‘refi nement' of the collection pursuant to the institution's collections management policy. For purposes of the Brodsky Bill, ‘refi nement' is defi ned as ‘changing the items in a collecting institution's collection in order to fulfi ll its mission statement and collections management policy'
- it has been established that the item is inauthentic
- the collecting institution is repatriating the item orreturning the item to its rightful owner
- the collecting institution is returning the item to the donor to fulfi ll donor restrictions relating to the item which the collecting institution is no longer able to meet; or
- the item presents a hazard to people or other collection items.
Those in favor of the Brodsky Bill argue that objects held by cultural institutions are held in the public trust to be accessible to present and future generations. Any proceeds from deaccessioned objects should only be used to acquire other works of art and never for operating funds, to build a general endowment or for any other expenses. They argue that this is the precise time to introduce such a bill, when certain institutions faced with financial pressure will be tempted to sell objects to the private sector. Critics argue that if there is a choice between selling objects and bankrupting the museum, the objects should be sold. Further, a one-size- fi ts-all regulation undermines the diverse circumstances affecting cultural institutions considering deaccessioning.
As stakeholders debate the merits of the Brodsky Bill and other States consider how to regulate deaccessioning, it is important that donors continue to carefully consider their own charitable motivations and execute gift agreements and testamentary instruments that clearly refl ect such motivations.