Estate Planning: Managing Art
It’s a common adage, in the art world, to advise art investors not actually to invest in art at all, but to collect it. Conventional wisdom says that art should be bought according to what you like, not what you expect to have a return.
But it’s naïve at best to ignore the possible implications. Collectors still must contemplate the effect that purchases may or may not have on financial matters—especially when it comes to inheritance. Financial advisors can add value by approaching the conversation with clients—what will happen to their art collection when they’re no longer around to enjoy it?
As an art portfolio increases in size or value, it may become a much more significant item in their financial and tax preparations.
Advisors should remind clients with large art collections that the planning was surrounding it also has tangible and intangible aspects—especially when concerning legacy issues. Tax consequences for heirs are often hefty and unpleasant—they may not be related to the collector or may not be connoisseurs.
It would be prudent for financial advisors encountering these issues to build relationships with specialist advisors that focus on tax and legal concerns within the estate planning and philanthropy. The expertise in art that these advisors have tends to be a ‘niche within a niche’ that fills a different role from art advisers that steer clients toward artists based on taste, budget, and the market.
The difficulty in pricing art is a favorable thing to investors during their estate planning efforts. Art is an asset that doesn’t solve any lifestyle or retirement goals, but it does have a distinct advantage as a wealth-transfer vehicle.
When passing on collections to children, it may be better for it to be valued as low as possible. Transfers to heirs—either as gifts during your client’s lifetime or as part of the estate after they pass, are taxed at high rates(however, the estate or gift amount usually has to be large before taxes kick in).
Since collectible art that is similar to each other isn’t often sold, a precise value for work is rather difficult to gauge—often leading to a situation where the tax authorities are more likely to accept low estimates for work. However, such estimates must come from an independent appraiser, and rules on valuation and tax code vary based on locale.
Collections can just be taken off the wall and put on a different wall. That transference of property that isn’t documented will avoid taxation, but if it’s not properly transacted it can lead to major issues down the line. This can result in an illiquid asset that generates a liquid liability.
For example, a collector’s heirs inherit a collection valued at $15 million dollars and the same amount in liquid assets—while being handed a $15 million estate tax bill. This leaves the heirs with few options: they can sell the liquid assets and pay the bill—with all of their wealth tied up in art, or they can sell the collection. The problems arise from becoming dependent on a volatile collector’s market—a market where $15 million art collections may fetch far less at auction.
Financial planning for art collectors often involves changing facts on paper without changing facts on the ground—advisors often find that recommending techniques for transferring ownership of art without transferring the art itself are the best course of action. Collectors can sell art to heirs—in exchange for cash or a promise to pay, or even place it in a trust or similar entity and then lease it back. Every strategy can carry a tax advantage, but it’s important for advisors to emphasize that any break depends on a particular jurisdiction’s legal framework.
This also provides an opportunity for financial planning advisors to add value to client relationships by counseling their clients on tax-efficient philanthropy. When a client expresses desire to give their collection to an institution, it’s may be wise if the appraiser bumps up estimates of valuation to maximize the tax write-off.
Collectors may also express an eagerness to be charitable—receiving a tax break while they maintain ownership of a collection, and may be able to navigate this narrow channel by lending the work to the institution or even remaining a part-owner and donating the rest.