The IRS treats collectors, dealers, and investors differently; choosing the wrong category can lead to less favorable tax treatment.
Unfortunately, if artwork and other collectibles are not specifically addressed in your estate plan, your heirs can be burdened with significant estate or inheritance taxes. Our experienced art and estate planning lawyers at Pierro, Connor, & Strauss can help you save substantial money, time and frustration while planning for these unique assets.
DECIDING WHAT TO DO WITH AN ART COLLECTION
There are many ways to treat an art collection as part of an estate plan. Each option can affect how your estate or heirs are taxed. The most common choices are:
- Leave to heirs – You may wish to bequeath individual items to specific family members or other individuals, and there is more than one way to do that. You can leave one or more pieces as a gift knowing that the recipient will not be under any obligation to keep or care for the artwork. Another option is to leave the art to an entity such as a trust or an LLC with instructions that they be insured and properly cared for.
- Sell – Some collectors choose to sell all or part of their collection and direct where the proceeds will go. Selling artwork is more expensive than selling other assets due to higher tax rates. The burden can be lessened with careful timing, so it helps to work with an experienced art lawyer.
- Donate – Leaving your art collection to a charitable organization has tax benefits for your personal taxes if donated while alive or for your estate if the donation is to occur upon death. However, if you wish to include any conditions to the donations, it is important to come to an agreement with the charity while doing your estate plan; waiting could jeopardize the donation and the tax benefit.
ASSESSING THE VALUE OF ARTWORK FOR ESTATE PLANNING
Both the market value and the intrinsic value affect how artwork can be treated as part of an estate.
The fair market value of a unique piece is not always clear. According to the IRS, “fair market value” is the price at which an object would change hands between a willing buyer and a willing seller when both are apprised of relevant facts, and neither is under pressure to complete the transaction. In addition, the art market is subject to fluctuations. The rise in intangible assets like NFTs (“non-fungible tokens” are digital signatures verifying ownership of, or the unique identity of, digital artworks) can further muddy the waters.
Under IRS rules, personal property having “marked artistic or intrinsic value” greater than $3,000 must have its value formally appraised. For estate purposes, artwork is valued as of the time of the owner’s death, so an appraiser will look at factors from that time. Part of the complex work that art appraisers do is assess the intrinsic value of art. This is determined by intangible qualities like its uniqueness or rarity. Factors like provenance, stylistic trends, and cultural importance play a role.
Though values can fluctuate, getting an understanding of your collection’s value and how it may change during the estate planning process can help you make informed choices.
Keeping a folder with this information can be very helpful to your family or estate administrator. There are also art inventory management tools available that can keep the information up-to-date, organized, and accessible when needed.
SPEAK WITH AN ESTATE PLANNING LAWYER FOR ART COLLECTORS AND CREATORS
Artwork presents special questions when it comes to estate planning. There are many options to meet your wishes and needs when it comes to the future of your art and other collectibles, but pre-planning is essential. Speaking with an experienced art estate and trust planning lawyer is an important first step.
The team at Pierro, Connor & Strauss has extensive experience in estate planning for art collectors and other aspects of gift and charitable planning. Call to schedule a free consultation with one of our Albany art estate planning lawyers.