Collecting art or other valuable items can be a passion for many people. Sometimes the passion is about investments because the art world has enjoyed enormous appreciation over the last few years. But more often it’s about enjoying the art or the medium itself than about ensuring financial gain. However, once you have accumulated a sizable collection, what do you want to happen to it after your death?
It is important that your estate plan address your art separately from your other assets.
The first step in estate planning for your collection is to prepare an inventory. You should not only have the collection appraised, but also take photographs of each item and assemble information relating to its authenticity and provenance, including artist notes, bills of sale, or insurance policies. Creating an inventory can be as simple as preparing an Excel spreadsheet listing each item, where you obtained it, what you paid for it, its value for insurance purposes and where it is located. It is equally important to update that spreadsheet after you purchase additional items or sell an item in your existing collection.
When considering what to do with an art collection, you have three main options:
- Sell the collection. If your family is not interested in maintaining your collection after you are gone, then you may want to sell it. If you sell the collection while you are alive, you will have to pay capital gains taxes on the collection’s increase in value since you purchased it. The capital gains tax rate on artwork is 28 percent, compared with the top rate of 20 percent for other assets. If you are the artist who created the item, you will pay ordinary income taxes on the difference between the cost of the materials used to create the item and the sales price. If the collection is not sold during your lifetime, each piece will be included in your estate at its fair market value at the date of your death, increasing the value of your estate for estate tax purposes and possibly causing a liquidity issue if your estate is subject to federal or state estate or inheritance taxes. However, each piece, including any pieces created by you, will be “stepped up” in value. This means that if your heirs sell the collection, they will have to pay capital gains tax only on the amount by which the pieces have increased in value since your death.
- Leave the collection to your heirs. You can give your artwork to individual family members, but a better approach may be to put the artwork in a trust or a Limited Liability Company (LLC). The trustee of the trust or manager of the LLC whom you appoint will be responsible for sustaining the collection, including maintaining insurance on the artwork, arranging storage, and making decisions about selling and buying pieces. You can leave instructions for care and handling of the collection. Any profits from the sale of items would be split among the beneficiaries of the trust or members of the LLC.
- Donate the collection. If you are a collector, you can donate your artwork while you are still alive and receive an income tax deduction based on the value of the items at the time of the gift provided that the charity use of the item is related to its charitable purposes. This can be a good way to pass on your collection while avoiding capital gains taxes. Should you choose to donate through your estate plan, your estate will receive a tax deduction based on the collection’s value at death regardless of whether or not the charity’s use of the item is related to its charitable purpose. But if you plan on donating at death, it is extremely important that you speak with the donee charity while you are alive to make sure that it will accept the items you wish to leave to the charity. Often the donee charity is not be interested in the items you wish to give away and if it is interested, you will likely also have to provide cash to maintain the item, in addition to the item itself. Deciding which option to take will depend on your circumstances and your family’s interest in the collection.
At Pierro, Connor & Strauss, we can design a customized plan for you and your family with regard to art and collectibles. Click here to request a free consultation. For more information watch our video series here.