The Daughters of Edward Darley Boit (1882), John Singer Sargent (1856-1925). Museum of Fine Arts, Boston
As collector, you have invested time, energy and resources to build a collection. Regardless of your collection’s value, it is important to determine what you would like to see happen to your artwork beyond your lifetime.
Often times, it difficult to consider the future and final disposition of a life-long collection. Estate planning with fine and decorative art can be a much more emotional process compared with traditional financial assets. Unlike other financial assets or real estate, fine and decorative art is intensely personal – it is less about numbers and more about your visual viewpoint. Your collection reflects who you are and what you have chosen to surround yourself with.
As a result, many collectors find it extremely difficult to make planning decisions about the ultimate disposition of their belongings. This means that your collection will most likely end up with an executor without direction or distributed to family members who may not share your enthusiasm. It is likely your collection will be sold after your time if you don’t plan ahead. Here are four options:
1. Sell The Collection
This may be the right choice for you if you need to offset income tax as these tangible assets are included in the estate for estate tax purposes.
But have you thought about :
Higher potential capital gains tax rates from the sale, and other costs it takes to sell — sales commissions, insurance and shipping costs, and sales tax when sold through certain venues such as auction or consignment with dealers.
You might risk a potential fire sale if your items are sold through an estate sale, meaning less money netted for your estate and potential wrong venues in which to sell some of your items. It is wise to retain an appraiser. Appraisers have a fiduciary responsibility to find the highest and best use for your items in the most appropriate market. Don’t risk in having some works/items under priced and misidentified. Call an expert — an appropriate appraiser trained and knowledgeable in their area.
Disposing of these works/items after your passing can eliminate capital tax gains but if sold collectively can mean depressed realized prices.
2. Gifts to Non-charitable Beneficiaries, (e.g., children or other heirs);
You can use your annual gift tax exclusion (currently $14,000) or lifetime exclusion (currently $5.49 million) to gift full or or even fractional ownership interests to your heirs.
3. Donations to Charitable Organizations, (museum, historical society, historic house museums, religious institutions)
Taking care of the disposition of your art/items now, rather than after you’re gone, can offer several advantages:
a) A work or item donated can result in an income tax deduction of up to 28% of your adjusted gross income based on the value of the work at the effective date (date of donation). Check with your accountant.
b) Fractional Donation: For those that simply are not ready to part with your artwork/things during your golden years can arrange a fractional donation over time. Tax rules require that an entire artwork must be donated to the museum/institution within 10 years of the original donation (or DOD, date of death, if earlier).
Be aware that the donee would be entitled to have the work for a percentage of the time within this 10 years.
Donation at Death: Your collection is gifted to the institution and your estate receives an estate tax deduction based on current valuation at death.
c) Talk with potential donees of your works/items where you wish to donate. Is it an appropriate venue? Will it support their mission? Will they accept your collection/work? Once donated many of these institutions have the right to deaccession or sell off your item without penalities after a three year period.
4. Trusts or LLCs
Avoid tax liability for an estate. Art, gifted to a trust, is appraised for tax purposes at the time of the gift. Placing art within a trust has several benefits. It can shield the assets from loss due to jurisdictional matters.
Depending upon what kind of collection you have, you may be able to place your art in a trust to shelter the appreciation, and then renting it back, so that you can hang it on your walls.
The cost of setting up a trust can be costly, and once in a trust cane be complicated, but the potential tax savings outweigh the setup costs.
5. Art-Backed Loans
Borrow against your collection to invest in capital elsewhere. This allows you to take advantage of buying more art or real estate, investing in or expanding business ventures, refinance debt, diversify an investment portfolio, or gift to heirs. The sale of art involves significant transaction costs and taxes, and federal long-term capital-gains tax on profit from the sale of art is 28 percent. Add on to this amount state and local taxes which can add to even more. This is an option if you want to keep your art on your walls. Interest on an art-related loan is generally less than the fees for an unsecured loan.
Beware:: The loan-to-value ratio usually cannot exceed 50 percent. Banks usually mandate that the art used as collateral must be appraised annually as the art market fluctuates. If the appraisal indicates that the value of the art has declined, then the borrower may have to repay a portion of the loan. The minimum amount usually starts at $100,000 for some banks, $1m for others. Lenders offer a variety of loan types Interest rates vary, check with your bank.