Collect Art? Make Sure Your Estate Plan Addresses It
In general, you should have your art collection appraised 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. Also, most art donations, gifts or bequests require a “qualified appraisal” by a “qualified appraiser” for tax purposes.
In addition, catalog and photograph your collection and keep these with your 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.
Generally, there are three options for handling your art collection in your estate plan:
Sell it. If you opt to sell, keep in mind that capital gains on artwork and other “collectibles” are taxed at a top rate of 28%, compared to 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. This allows your heirs to reduce or even eliminate the 28% tax. 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.
Bequest it. If you prefer to keep your collection in the family, you may opt to leave it to your heirs. You could make specific bequests of individual artworks to various family members. But of course, 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. In this case, you would appoint a qualified trustee or manager to oversee maintenance and display of the collection and make sale and purchasing decisions.
Donate it. Donating your artwork can be an effective way to avoid capital gains and estate taxes and to ensure that your collection becomes part of your legacy. It also may entitle you or your estate to claim 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 public charity — such as a museum or university with that status — rather than a private foundation. And the recipient's use of the artwork must be related to its tax-exempt purpose. In other words, the recipient would have to exhibit it or use it for art education, for example, rather than selling it. Also, if you wish to place any conditions on the donation, such as specifying where the collection can or can't be displayed, you'll need to negotiate the terms with the recipient before you deliver the items.
If you opt to donate your collection to charity or leave it to your heirs, discuss your plans with the intended recipients. If your family, for instance, 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. That way, you have an opportunity to make alternative arrangements.
Not all advisors have experience working with art collections. So make sure you choose someone who understands the unique estate planning issues surrounding works of art. You've likely spent a lot of time and money building your collection and want to ensure that, even after you're gone, people who appreciate it can view it.