After the Barnes Ruling: What Donors Should Do to Protect Their Wishes

Donors have had plenty of reasons in recent months to wonder about how best to ensure that charities are

carrying out their wishes. In the Senate, well-publicized hearings have been held about abuses by charities and foundations, and the Internal Revenue Service has stepped up its monitoring of nonprofit groups out of concern about improprieties.

Perhaps the strongest reason donors have been given to worry, however, is a court ruling in Pennsylvania in December involving the Barnes Foundation and its extraordinary collection of impressionist and modern art, which includes 57 Cézannes, 54 Matisses, 170 Renoirs, and 20 Picassos, and which is estimated to be worth at least $6-billion.

The charter and bylaws drawn up some 80 years ago by the collector and philanthropist Albert C. Barnes included restrictions that none of the paintings could be lent, sold, or even moved from the walls of the Merion, Pa., gallery he created to house his collection. Public access to the collection was also to be strictly controlled. Dr. Barnes intended that his collection be used primarily for the benefit of students of the art school that he also established. It was not to be run like a museum with unlimited public access.

Confronted with the terrible reality that the foundation was on the brink of financial collapse, its board asked the court for permission to move to downtown Philadelphia. There, because of pledges from three large foundations and an augmented development effort, the hope is that a new $100-million museum will be built to house the Barnes collection.

The court allowed the trustees to alter Dr. Barnes’s instructions, a decision that should prompt all donors and their advisers to seriously explore what steps they should take to ensure that the specific conditions and restrictions they place on their gifts will remain in effect.

The Barnes case suggests that the challenges to carrying out a donor’s wishes may arise at two levels.

The first concern is that the charity might not manage its finance and operations soundly — and if it does not do that, as appears to have been the case at the Barnes Foundation, it might not be possible for the nonprofit group to carry out a donor’s intent.

To avoid getting into a bad situation, donors should require a beneficiary of a large gift to submit periodic reports on its financial operations to donors or their representatives.

Drafting such provisions requires care in order to maintain the balance between attaining the donor’s wishes for sound management while avoiding undue interference with the administration of the charity. Thought must also be given to exactly what donors or their associates should be empowered to do if they see indications of improper management. Those issues must be dealt with by the donor and the donor’s advisers in a manner consistent with the tax code, so that the tax-deductibility of the gift is not jeopardized by the donor’s retaining too much control.

The second level at which the donor’s intentions may be challenged is, as in the Barnes case, when a court orders a nonprofit to deviate from a trust’s provisions.

While the result in the Barnes situation is arguably sound, no one can argue with certainty that it reflects the donor’s wishes. Indeed, during the hearings before the court, the chairman of the Barnes Foundation’s Board of Trustees acknowledged that a “walk-through” museum was anathema to Dr. Barnes, and that he made it clear in the documents creating the foundation that the gallery should be open to the public only one day a week, with the rest of the week devoted to art education.

Therefore, in the course of making gifts, donors should consider the possibility that as the years go on, charities, trustees, or others might decide it is wise to seek to alter the gifts’ terms. Thus donors should explore whether they want to include an alternative charitable disposition of their assets instead of risking the possibility of a court-ordered deviation.

For example, Dr. Barnes could have stated more clearly that in case his wishes could not be fulfilled, the collection would be sold and the proceeds used to endow an art-education program at a university.

Alternatively, a donor could be less specific and confer a power on a designated person or a committee to reform or modify the gift in a manner most closely approximating the donor’s charitable objectives.

Such provisions require careful thought and planning, particularly the delineation of the circumstances that would lead to an alternative use of a gift. Legal advisers and others would also have to determine whether that approach could lead to tax problems or other concerns.

In the background lurks the broader question of who should have the legal authority and standing to challenge a charity’s mismanagement or its failure to carry out the donor’s wishes, especially after the donor’s death.

In many states, donors have the right to seek enforcement of the terms of their gifts during their lifetimes. New York courts have recognized a right to a court-appointed fiduciary or representative to enforce a gift’s terms after a donor has died.

While donors should be able to confer such a power on a designated person or committee, it is unwise to let just anybody have the legal right to contest whether a donor’s intent is being followed. Individuals or organizations could interfere in ways that harm a nonprofit group, and even thwart the attainment of the donor’s goals.

Ultimately, if donors cannot be assured that the conditions that they place on their gifts will be carried out according to their wishes, donors might be less willing to donate to charities.

Thus, it is in the mutual interest of donors and charities to work cooperatively and carefully together in planning charitable gifts and drafting the legal documents that govern their administration. Donors and charities should bear in mind the admonition that, without careful planning and execution, their laudable goals and hopes may provide a good breakfast but a poor supper.

William Schwartz is counsel at Cadwalader, Wickersham & Taft, in New York, and the former dean of the Boston University School of Law. Francis J. Serbaroli is a partner at the firm.