Art museums in the United States live on the generosity of individuals. Most of the financial support they count on for their annual operating budgets come from individuals, or foundations and trusts set up by them. Moreover, because art museums rarely have substantial acquisition-related endowments, they depend on bequests and donations to grow their collections. The Association of Art Museum Directors, for example, reported that 80 percent of the objects entering North American art museums in 2016 came from donations or bequests.
If you are considering making a major gift to an art museum, then it is important to understand how museum development staff can collaborate with you to design a mutually beneficial gift agreement. The first important question is whether you want to donate cash, art, or some combination of the two. If just cash (and/or marketable securities), then the negotiation process will revolve principally around five variables: restrictions on use, contribution timing, matching requirements, donor recognition, and reporting requirements on use of funds. While there is some subtlety and nuance associated with negotiating these types of agreements, donating art is generally much more complicated because the needs and interests of the museum and collector are more likely to diverge.
Collectors and museums both love art and objects, but they may have different views on which works are important to scholars and museum audiences. Moreover, because most museums can only show a fraction of their collection at any one time (generally 5 percent or less of the total object count), they are loath to enlarge their collections with material that will spend most of its time in costly storage facilities. One of the biggest planning mistakes collectors make is to assume that art museums will be excited to accept works from their collection.
Collectors should start the donation process by creating a short list of museums where they would like to see the work(s) go. The more important the museum, the more important the work needs to be. To avoid disappointment, it is best to have different levels of museums on the list. If you know with certainty that you will donate the work after finding a suitable home for it, then there is less of a need to get an appraisal before contacting museums. But if the value of the object will influence whether or how you donate it, then first get an appraisal from a qualified professional. This is especially true for works with a potential donation value of $50,000 or more because the appraisal will be closely scrutinized by the IRS.
Assuming a suitable museum is interested in the work(s), there are three basic donation deal structures: donate the work now; make a promised bequest; or donate a fractional interest, perhaps 25 percent, with the balance donated later. There is one additional deal structure, called a bargain sale, but it is rarely used. This occurs when the museum is offered the opportunity to buy the work for less than its fair market value. The collector gets a charitable donation equal to the difference between fair market value and the sale price, along with sale proceeds. These deal structures have very different financial planning, tax, and operational implications. As a result, collectors need to be acutely aware of the differences so they can make an informed decision on whether and how to proceed.
CASE STUDY: DONATING A MAJOR COLLECTION
Sally and John, collectors who want to remain anonymous, have a wonderful collection of drawings, paintings, and sculptures by leading American and European Post War and Contemporary artists. Because their children will inherit a great deal of wealth, and none are interested in living with the collection, the couple decided to pursue donating their collection to a major institution. After selecting three museums, they negotiated simultaneously with all of them to get the best possible promised gift deal. Because of the quality of the collection and their willingness to work creatively with the institution around deal structure, they inked an agreement with the following terms:
Timing. Title to the collection will go to the museum after both Sally and John have passed away. Until then, the collection will remain in their homes for them to enjoy.
Museum obligations. The museum will publish an illustrated catalog on the collection, including essays by leading scholars, within 4 years of signing the promised gift agreement. The museum will also mount a show of important work from the collection, coupled with an education and outreach program evangelizing the significance of the gift to the museum, to coincide with the publication of the catalog.
Optionality. Due to the size of the collection and the long-term costs the museum will incur for preservation, restoration, storage, and display, Sally and John gave the museum the right to sell non-core elements, subject to certain timing restrictions. In return, the museum committed to keep core elements of the collection [which was a defined term in the promised gift agreement] in perpetuity and to show these works at least once every 5 years, either individually or in groups.
Annual contributions. The couple agreed to make substantial unrestricted annual contributions in each of the next 5 years to support museum programming, acquisitions, and research.
Donor recognition. While the museum wanted to announce the promised gift when the agreement was signed, the couple instead elected for the announcement to occur when the collection show opens at the museum. They also elected to have their annual unrestricted contributions be noted in all museum publications as ‘anonymous’ so as to minimize unsolicited requests for funding from other philanthropic organizations.
A version of this article appeared in Negotiating Charitable Gifts, a special white paper published by UBS in November 2017 for their private banking clients. Click here for a PDF copy of the paper.
Doug Woodham is the Managing Partner of Art Fiduciary Advisors, an advisory practice based in New York City that helps clients create legacy plans for their art collections. The firm offers comprehensive services, from clarifying family goals and evaluating alternative disposition strategies, through the execution of donation and sale agreements. The firm also advises collectors, artists, and institutions on the sale of art so they can be assured of maximizing sale proceeds in a very complex and opaque art marketplace. Earlier in his career, Doug was President of Christie’s for the Americas and a Partner with McKinsey & Company. He is also the author of the best-selling book Art Collecting Today: Market Insights for Everyone Passionate About Art (2017).