Distributing the cookies, wine and art

Where do you begin when planning for the legacy of your collection?

Part I of this series covered the important first steps to lay the groundwork: ensuring you have an inventory, updated appraisals, and a comprehensive insurance policy in place for your collectibles. Once these items are in place, you now have the essential tools to start planning for the legacy of your collection. Although tax implications may influence the creation of the distribution plan, answering personal questions about your ideal legacy and values are key. So what do you need to ask of yourself?

Doug Woodham, Managing Director at Art Fiduciary Advisors, suggests,

“The first step is a candid assessment of the family’s goals and attitudes toward the art collection. How important is it to keep the collection intact during the collector’s lifetime? What promises have been made to family members, museums, or other institutions? Are potential heirs ready and able to take responsibility for the collection, or are they primarily interested in what it is worth?”¹

Although these questions can be challenging, the answers ultimately allow collectors to be proactive in defining their legacy.

A liquid legacy 

A collection can have financial, sentimental and collectible value, each of which should be considered when selecting an appropriate legacy plan.

I recently met a wine collector who was selling a large portion of his renowned cellar at auction. I asked what had spurred him to sell what was considered by many to be an iconic collection of Grand Cru French wines and cult California cabernets. He replied that his reason was the tastes of two of his two children: his daughter, who has diabetes, doesn’t drink, and his son prefers craft beer and whiskey over wine.

Knowing that both his heirs were not interested in his collection, and wouldn’t know what to do with it upon his death, this elderly gentleman decided to sell his liquid assets during his lifetime. He decided to donate some auction proceeds to charities he is involved with, including a foundation that researches diabetes. The rest of the proceeds will go into a trust for his heirs. With a smile, the wine enthusiast did assure me he hadn’t given up his liquid love completely—he had kept a few cases of his favorite vintages at home for future enjoyment.

This passionate collector asked the tough but relevant questions during his lifetime. While it may have been difficult to acknowledge that his collecting passion would end with him, he was savvy enough to acknowledge how his collection could still benefit his heirs and have a lasting impact on causes he believes in.

To sell, donate, or give?

Selling one’s collection is one option. As the wine collector illustrates, the money can be distributed to heirs, benefactors, trusts and charities. Other collectors use the proceeds to pay off estate tax obligations.

For collectors who want to be associated with the beloved art objects after they pass, they may also choose to:

• Donate art to a museum or non-profit
• Gift art to heirs or beneficiaries

A donation is something given to a qualified charitable organization, and that donation is tax deductible. A gift to a family member, however, may be subject to a gift tax.

The best way to manage the potential tax implications and benefits is to meet with your accountant, financial advisor and a lawyer specializing in estate taxes to discuss the potential financial implications of your estate value and the various distribution options.

Exploring donations and gifts

Donating to a museum can be a satisfactory way for an art collector to culturally enrich their community, be philanthropic and receive a tax deduction. The popularity of cultural philanthropy is underscored by a 2016 report from The Association of Art Museum Directors, which states that 80 percent of the objects entering North American art museums in 2016 came from donations or bequests.²

Beth Smith, an Executive Director of Advanced Planning at Morgan Stanley, acknowledges the tax incentive,

“Gifts to public charities receive the highest income tax deduction for art- work, and most museums are treated as public charities. That helps to maximize the amount that donors can deduct from their income taxes over their lifetimes for gifts of art.”³

If you decide to donate, there are many factors to consider. As valuable as your Picasso may be, if your local museum already has twenty, they may not need another. However, a local university may not have such a well-endowed collection and could be delighted by the donation. Some museums will also request a donation to help underwrite the cost of absorbing the new artwork into the collection, such as conservation, restoration and storage. If you are considering a donation to a museum, consider working with an art or financial advisor who can help you navigate the options and donation terms.

Donations require appraisals, too

Donations—and gifts of a certain value—require appraisals to substantiate the tax benefits. The Art Advisory Panel of the IRS reviews appraisals valued at more than $50,000 that taxpayers submit to support Fair Market Value claims involved with income, estate and gift tax returns. In 2016, the Panel reviewed 555 items, accepting 40% of the appraised values, and recommending value adjustments on the other 60%.⁴

Elizabeth von Habsburg of the independent appraisal firm Winston Art Group illustrates the experience of a client. A museum director, seeing the work of a highly sought-after contemporary painter in a client’s residence, asked if the client, who was a trustee of the museum, might consider donating it. The client agreed immediately, and the work was donated using the full purchase price of $500,000 for valuation purposes. The IRS, reviewing the donation, questioned the value, which was submitted using the full purchase price.

The IRS rejected that Retail Replacement Value, and the client came to Winston in need of a Fair Market Value appraisal.

Why did they reject this value? Retail Replacement Value (in this example, the full purchase price) and Fair Market Value (the value required by the IRS for donations) are often two very distinct values. This difference is explained in my post on art appraisals and insurance. In this case, explains Elizabeth, the right consultation allowed the client to donate their artwork.

“Based on our research, the Fair Market Value was $150,000, and therefore the amount the client could claim as a deduction. The IRS accepted this value, and the client still had the prestige of contributing a stellar work to the museum and reducing their tax exposure.”

Insurance implications

When it comes to insurance, it’s critical to make certain all the names of the art owners are on your insurance document. This includes trusts, estates or other legally filed entities that may have insurable interest in the collection. Therefore, in the event of the death of one or both of the collectors, the children, or other beneficiaries, have legal title.

With a sophisticated insurance company, trusts, estates and LLCs can be a named as the “insured” or as an “additional named insured,” which can simplify this process.

Planning how you will pass on your treasured items is an important consideration for every collector. From properly inventorying, appraising, and covering your items in your lifetime, to planning how you will pass them on, it’s important to engage the right specialists for direction and guidance.

Whether your art hangs on the wall of a museum or your grandchild’s room, you receive the most advantages—personally and financially—when you are driving your legacy.

Katja Zigerlig is Vice President, Art, Wine + Collectibles Advisory at Berkley One (a Berkley Company).