By: Martin M. Shenkman, CPA, MBA, JD
The famous Barnes Foundation operates an incredible art museum in Merion, PA, featuring scores of Cezannes, Matisses and Renoirs. Unfortunately, due to severe restrictions in the foundation’s trust indenture, this venerable institution is on the verge of bankruptcy. A plan was proposed to save the Barnes Foundation, if the court would release it from the requirement to operate in Merion and to invest its endowment solely in government securities. Two legal theories were invoked: the deviation doctrine and cy-pres. The deviation doctrine permits a variation from the terms of a trust when circumstances, unforeseeable by the donor, are such that the intent of the trust would be defeated, absent the deviation. If the court did not permit the Barnes Foundation to deviate from the restriction on exhibiting art holdings outside of Merion, PA, the primary intent of the Barnes Foundation could be undermined. Cy-pres is a legal doctrine which provides that a legal document, such as the trust in this instance, should be interpreted to carry out the intent of the parties as closely as possible to the document, when exact compliance would be impossible. Some valuable lessons can be learned from this situation: flexibility, caution, and clear written donor agreements should be used when planning gifts. Restricting investments based on current conditions is never wise. Administrative and operating restrictions should, similarly, be flexible to address changes in charitable purpose. If the donation is to combat a particular disease, what if the sickness is cured? What should the donation be used for then? If the charity violates the parameters of the gift, should the agreement provide for a gift-over to another charity? What mechanism can be provided to modify and interpret the terms of the gift in future years to keep it viable?
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