Some assets pose more of a challenge than others when it comes to valuing and accounting for them in an estate plan. Take, for instance, your art collection. If you possess paintings, sculptures or other pieces of art, they likely represent a significant portion of your estate. Here are a few options available to address your art collection in your estate plan.
Seek a professional appraisal
It’s vitally important to have your collection appraised periodically by a professional. The frequency depends in part on the type of art you collect, but generally it’s advisable to obtain an appraisal at least every three years, if not annually.
Regular appraisals give you an idea of how the collection is growing in value and help you anticipate tax consequences down the road. Additionally, many donations, gifts or bequests of artwork require a “qualified appraisal” by a “qualified appraiser” for tax purposes. Such an appraisal provides a strong foundation for preserving your collection.
You should also catalog and photograph your collection and gather all appraisals, bills of sale, insurance policies and other provenance documents. These items will be necessary for the recipient or recipients of your collection to carry out your wishes.
Sell it, bequest it or donate it
Generally, there are three options for handling your art collection in your estate plan: Sell it, bequest it to your loved ones, or donate it to a museum or charity. Let’s take a closer look at each option:
- If you opt to sell, keep in mind that long-term capital gains on artwork and other “collectibles” are taxed at a top rate of 28%, compared with 20% for other types of assets. Rather than selling the collection during your lifetime, it may be preferable to include it in your estate to take advantage of the stepped-up basis. That higher basis will allow your heirs to reduce or even eliminate the 28% tax if they choose to sell the artwork. For example, you might leave the collection to a trust and instruct the trustee to sell it and invest or distribute the proceeds for the benefit of your loved ones.
- If you prefer to keep your collection in the family, you may opt to leave it to your heirs outright. You could make specific bequests of individual artworks to various family members, but there are no guarantees that the recipients will keep the pieces and treat them properly. A better approach may be to leave the collection to a trust, LLC or other entity — with detailed instructions on its care and handling — and appoint a qualified trustee or manager to oversee maintenance and display of the collection and make sale and purchasing decisions.
- Donating your collection can be an effective way to avoid capital gains and estate taxes while also ensuring that your collection becomes part of your legacy. Plus, donating your collection to a charitable organization (as defined by the Internal Revenue Code) entitles you or your estate to a charitable tax deduction. To achieve these goals, however, the process must be handled carefully. For example, to maximize the charitable deduction, the artwork must be donated to a publiccharity rather than a private foundation. And the recipient’s use of the artwork must be related to its tax-exempt purpose. Also, if you wish to place any conditions on the donation, you’ll need to negotiate the terms with the recipient before you deliver the items.
Whether you plan to leave your collection to loved ones or donate it to charity, it is critical to discuss your plans with the intended recipients. If your family isn’t interested in receiving or managing your collection, or if your charitable beneficiary has no use for it, it’s best to learn of this during your lifetime so you have an opportunity to make alternative arrangements.
Enjoy your collection
A primary goal of estate planning is to remove appreciating assets from your estate as early as possible to minimize gift and estate taxes. But for many, works of art are more than just assets. Indeed, collectors want to enjoy displaying these works in their homes and may be reluctant to part with them. Your estate planning advisor can help you properly address your art in your estate plan.