Just as there is an “art” to collecting artwork, there is an “art” to addressing artwork in a person’s estate plan. The failure of properly planning for the disposition of an artwork collection upon the person’s death can be costly—both in terms of money and family conflict.
The failure to properly plan may be just as common as the frequency in which valuable artwork is stolen. In a 2017 Deloitte survey, 89 percent of private banks surveyed offered art and estate planning services:
[but] only 28 percent [of those banks reported] that their clients had made adequate provisions for their art collections in their estate plans, and 31 percent said that their clients had not addressed their art collections in their estate plan at all. A further 41 percent of private bankers said they are unsure about their clients’ level of preparedness when it comes to their art collection and estate planning.
When the question regarding estate plans was posed to art collectors, the results were just as remarkable:
[…] 19.8 percent of collectors say they are thinking about formalizing the plan for their art collection, but it is not yet documented. [In other words, they have nothing in place!] Only 10.9 percent of collectors surveyed have no plans or see no purpose in planning for such an event (emphasis added).
But proper planning is more than just creating an estate plan. Proper planning is the tax-efficient transfer of the artwork to others. Remember, two types of death taxes may be assessed on property after a person dies: estate taxes and inheritance taxes. (But it would also be remiss to not mention that gift taxes and capital gains taxes may be assessed as well. Gift taxes cap both the amount of money a person can gift annually and over his/her lifetime. If a beneficiary later decides to sell an inherited asset, he/she will then have to pay taxes on the net gain of the sale.[1]) An estate tax is calculated by subtracting the estate’s liabilities from the net value of property owned by the decedent as of the date of death; however, only the net value of an estate exceeding the amount of the exemption is taxed. (Both the federal and state governments can impose this tax; fortunately for Floridians, there is not an additional state estate tax.) An inheritance tax, on the other hand, exists only in a handful of states (not including Florida) and is paid by the beneficiary when he/she receives the asset from the decedent’s estate.
For collectors, these taxes—most especially the estate and gift taxes—should be of significant concern given that the value of one piece of artwork in a collection can easily exceed the current $11.18 million federal estate tax exemption and the current $15,000 annual gift exclusion.
The first step in proper planning is building files of ownership (e.g. certificates of authenticity, bills of sale, insurance records, etc.) so as to adequately address issues of provenance. Generally, the greater the distance between the collector and the artist and the older the artwork, the more likely there will be questions of provenance. Therefore, it is good to establish and safeguard these ownership files.
The second step in proper planning is determining what should be done with the art collection after the collector’s death. One of three things can occur. The collector can make plans to:
- sell the collection;
- pass the collection (or specific pieces) to heirs; or
- donate the collection.
Of course, each option has its own advantages and disadvantages.
With regard to selling the collection, the collector will likely incur numerous expenses, including a hefty capital gains tax (especially if the artwork was bought decades ago and has exponentially increased in value). Other expenses will include the payment of sales commissions, other taxes, and possible shipping. And if the sale is made post-death, the entire value of the collection will be included in the estate for purposes of estate tax. (We definitely do not want that!) Selling is likely the collector’s most expensive option.
Should the collection be left to heirs, the collector can decide to do so outright—but again, inheritance and/or gift taxes may rear their expensive and ugly heads. Alternatively, the collection can be transferred to a limited liability company (LLC), which makes bequests of specific pieces and the splitting of profits much simpler. If left in an LLC, the heirs will own the interests in the LLC rather than the art itself and can be appointed as managers to control the art. Nonetheless, it is important to note that, in either scenario, the resources to properly maintain the artwork will need to be provided.
Lastly, an art collector can choose to forego the above options and donate the artwork to a museum or charitable organization, whether it occur during life or upon death. (See our celebrity article on the Rockefeller estate.) If donated while still alive, the collector will be entitled to an income tax deduction of up to 30 percent of his/her adjusted gross income. This will be based on the value of the work at the time of the gift. However, if donated upon death, the collector’s estate will receive a tax deduction based on the current valuation.
The end goal of creating an estate plan is to provide peace of mind knowing that one’s family and assets will be well taken care of when that person passes away. For estates that include artwork collections, the way that the art is handled could impact the person’s tax obligations. Thus, proper planning will be necessary to ensure tax-efficient transfers in such a way that the collector’s art will be well treated while retaining the work’s value.
References
[1] The capital gains taxable rate depends on a number of factors: (1) how long the asset the beneficiary held the asset before the sale; (2) the beneficiary’s tax bracket; (3) the beneficiary’s taxable income; and (4) the beneficiary’s filing status.
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