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How do you smartly leave an art collection to a charitable cause? That’s the issue that William Louis-Dreyfus has been grappling with these past several years, after spending half a century amassing a collection of 3,500 artworks. The former chairman of Louis Dreyfus Holding B.V., one of the largest family businesses, is in the process of selling off his massive collection so he can donate the proceeds to the Harlem Children’s Zone.

The Paris-born Louis-Dreyfus, 82, says his bequest ranks as his first major act of philanthropy. The collection comprises some 170 artists, including Alberto Giacometti, Wassily Kandinsky, and Jean Dubuffet, and is worth anywhere from $10 million to $50 million, he estimates.

Anne Williams-Isom of the Harlem’s Children’s Zone with students. Photo: Matthew Furman for Barron’s

“I realized one morning that my children do not need to be any richer than they are, and they did not need the spoils from my collection,” he tells us. Instead, “I could do something good, and that I believe in.”

The impetus for Louis-Dreyfus’ decision came four years ago, when he watched a 60 Minutes profile on the Harlem charity. It explained the organization’s innovative “cradle to college” approach to breaking the cycle of generational poverty through an interconnected set of community and parenting workshops, as well as preschools, charter schools, and colleges. It all struck a chord with Louis-Dreyfus. “I just knew that whatever I was going to do with my art would involve black Americans or people in schools,” he says. “It was not going to the Met or MoMA.”

So, in March 2011, Louis-Dreyfus brought his proposal to the Harlem Children Zone’s founder and then-CEO Geoffrey Canada, and to Chief Operating Officer Anne Williams-Isom, who is now running the organization. Louis-Dreyfus showed up without an entourage. “He was very unassuming, so on the ball, so well educated, and superconnected to otherness and to black people in this country,” recalls Williams-Isom. “Here was this 80-something white man coming into our office and talking about racism. Geoffrey and I both had our jaws on the floor.”

As it turns out, the Harlem Children’s Zone was already well known among Wall Street philanthropists, but it had reached an inflection point after 20 years in operation. It had plans to increase its endowment from $300 million to over $400 million to support $30 million in annual operating expenses, but it also wanted a durable financial strategy that could transcend its executives’ personalities and support its students (currently numbering 12,300) through college. Louis-Dreyfus’ gift would go a long way toward aiding the organization’s goal of establishing its long-term financial stability.

THE ART WORLD LEVITATES on high-profile bequests, such as Leonard Lauder’s donation of 78 cubist masterpieces worth over $1 billion to the Metropolitan Museum of Art in New York. Exhilarating as such generosity is, Louis-Dreyfus’ gift offers an entirely different stripe of magnanimous gesture, and it raises interesting questions -- such as how to structure an art gift based not on creating a cultural monument to the collector, but on maximizing its monetary value to advance a worthy not-for-profit; this, plus adhering to the wishes of its benefactor long into the future.

William Louis-Dreyfus, making his art collection count. Photo: Louis-Dreyfus Family Collection/Shaun Gillen

Perhaps the most prominent effort of this type was the collection built by Albert Barnes, a chemist who in 1922 established the Barnes Foundation in a Philadelphia suburb. Today, his creation is largely viewed as a case study in how a benefactor’s intent can be overridden and unraveled. Like Louis-Dreyfus, Barnes planned to use his collection of impressionist and modern masterworks (worth an estimated $25 billion today) to combat inequality and poverty, especially among African-Americans. He left a majority of the trusteeship to the largely black Lincoln University and, rather than establish a museum, intended his collection to function as a school.

But Barnes also left an overly restrictive set of guidelines; the art could not be sold or loaned, the collection’s endowment could be invested only in low-yield securities, and the works were to be viewed by application only. But mismanagement and an alliance of “civic” forces -- the very establishment figures that Barnes railed against -- conspired to violate the stipulations he codified in his trust before his death in 1951. Two years ago, after a lengthy court battle, the entire collection was relocated from its original neoclassical home in Lower Merion, Pa., to a new, $150 million gallery in downtown Philadelphia -- and opened to the public.

For his part, Louis-Dreyfus has transferred much of his artwork to the nonprofit William Louis-Dreyfus Foundation, but he doubts that his provisions will meet a similar fate. “I don’t think my foundation will be interfered with,” he says. “What we are doing is quite straightforward.” Unlike Barnes, who wanted to preserve his collection, Louis-Dreyfus intends to sell his artworks and simply hand over the proceeds to the Harlem charity. On paper, that decision does seem to bypass many of the Barnes issues.

Louis-Dreyfus says that the pieces will be sold off individually or in groups over the coming years, based on the market. The proceeds will be set up in such a way that the Harlem organization has a pool of capital to draw from over time. But there are some serious hurdles to be overcome, including the fact that many of the artists Louis-Dreyfus collected are obscure and do not currently command top dollar (see box, below). Meanwhile, during the start-up phase, Louis-Dreyfus will cover the foundation’s operating costs; eventually, a portion of the artworks’ sales will pick up this expense. Louis-Dreyfus insists the Harlem charity will not have a say in the timing of the sales. His board will be the sole arbiter, in consultation with himself, and will base decisions on the foundation’s cash needs, market conditions, and other circumstances.

Motivated to do something similar with your own art collection? Ramsay Slugg, a U.S. Trust Bank of America wealth strategist who specializes in art, recommends becoming aware of the related-use rule. “If you are going to give to a charity, make sure that the charity will use the artwork as part of its mission,” he says, “and if it does not, that means the donor will be limited to a cost-basis deduction.”

In other words, let’s say an artwork in Louis-Dreyfus’ collection was purchased for $1,000 two decades earlier and is now worth $100,000. If the art is sold and the proceeds given directly to the nonprofit, the donor can deduct the full $100,000. But if the donor instead gives the artwork to the charity, only the $1,000 cost of the work is deductible (with both scenarios subject to general charitable deduction rules), because the art itself is not part of the organization’s core mission. Such deductions add up if you have a major collection purchased over 50 years.

An Outsider’s Eye

In 1965, William Louis-Dreyfus bought a Wassily Kandinsky watercolor. Then a lawyer, Louis-Dreyfus was looking to do something with his bonus other than putting it in the stock market, which he didn’t trust. Max Ernst paintings were selling for more than Kandinsky’s, but believing the latter to be more masterful, he bought the Kandinsky. Today, his private Mount Kisco, N.Y., gallery contains 3,500 works.

A great deal of the collection is “outsider art,” or works created by untrained artists who often live on the margins of society, and not infrequently in mental institutions or prisons. Among them: Bill Traylor, a man born into slavery in Alabama who began to draw when he was 85. Another corner of the museum is devoted to James Castle, an artist whom Louis-Dreyfus calls the “soul of the collection.” Born deaf, Castle’s drawings are made almost entirely from found materials. “I saw his paintings and said they looked like Seurat. His drawings have an unbelievable quality.”

But that’s a problem of sorts for the Harlem Children’s Zone, which is hoping for a huge windfall. The collection is based on Louis-Dreyfus’ personal if idiosyncratic tastes, as well as his rejection of popular, market-driven art. He doesn’t own a Jeff Koons or an Andy Warhol, and he shuns the art-fair circuit, calling the works shown there overpriced. And while he does own a few marquee names, he says, “I bought what I liked....This was not meant to be a financial asset.”

That’s why the collection’s disposal is still being determined, and how that’s done will be key to the project’s success. In order to get the maximum benefit for the Harlem organization, Louis-Dreyfus is waiting to sell the works when, he hopes, the prices for his collection have moved north. “This is a long-term affair,” he says. “It is a question of judgment. We have to reach a decision based on the art’s value and how it will be sold at its most advantageous.”

That means, in the short term, he’s in the business of market-making -- raising the profile of works in his collection so that their prices catch up to his lofty opinion. To that end, he continues loaning works to galleries and museums and talking to the press. A documentary made about his collection, called Generosity of Eye and narrated by his daughter, the acclaimed actress Julia Louis-Dreyfus, was released online last summer. We’re hoping that as many Harlem Children’s Zone students as possible get a superlative education out of Louis-Dreyfus’ market-making success. -- S.P.

E-mail: penta@barrons.com