Though we often associate estate planning, the process of preparing for the transfer of wealth, with tangible assets like real estate or cold, hard cash, or even intangible assets like banking or investment accounts, the fact of the matter is that for those of us who take pride in our art collections, making sure we account for any pieces of art under our name is crucial for the effective and efficient transfer of wealth, whenever the time may come.
One of the reasons why accounting for the ownership of artwork is important when drafting an estate plan is to avoid familial headaches down the line. Interestingly enough, however, it is common for many affluent art collectors to do a substandard job, or even completely disregard addressing their art collections in their estate plans. A failure to plan of this magnitude is a mistake that can prove costly to families as it invites the potential to owe significant amounts of money in estate taxes. Additionally, without an estate plan to provide clear instructions on the distribution of the artwork, the assets can be divided unfairly which can, in turn, result in family conflict and expensive litigation.
Perhaps the primary reason that artwork should be properly addressed in an estate plan revolves around the aspect of taxation, particularly on pieces of art that have appreciated in value over time. Although art investors are usually advised to not “invest” in art, but rather collect the pieces that they find appealing, financial matters do end up coming into play when it comes time to think about leaving an inheritance for your heirs. As someone’s art collection becomes more valuable, it becomes a more significant item in their financial and tax lives. With regard to estate planning, the fact that any given piece of art is of an illiquid valuation, or in other words, can be difficult to put a concrete and exact value on can be a powerful tool in minimizing one’s tax liability. If you’d like to pass your Van Gogh on to your kids, it’d be in their best interest for the piece to be valued at the lowest valuation possible, especially since transfers either as gifts or as a part of an estate after death are taxed at particularly higher rates. However, because Van Gogh works similar to yours are not sold very often, a precise value for the piece is hard to gauge, and authorities are more likely to accept a lowball estimate as the actual value, therefore decreasing your heirs’ tax liability.
As the wiggle room in valuing a piece of art suggests, financial and estate planning for collectors often involves changing facts on paper without altering them in reality. For example, collectors can sell art to heirs for a fee or a promise to pay, and simply lease it back to avoid the burden of the estate tax. Furthermore, a common estate planning tool, the irrevocable trust, allows art collectors to accomplish much the same purpose. By transferring their art into an irrevocable trust, art owners are able to reap tax benefits, since the artwork is no longer legally part of an estate, while still keeping possession. Additionally, tax savings go beyond merely removing artwork from an estate. The artwork, which is legally gifted to the trust, will be appraised at the time of the gift and the amount of the appraised value above the, as of 2018, $15,000 annual gift tax exemption will be deducted from the owner’s lifetime combined federal gift-tax and estate tax exemption, currently standing at approximately $11.2 million, essentially allowing owners to shelter the appreciation on their artwork while minimizing their tax liability.
As mentioned, a perk of placing artwork in an irrevocable trust is the fact that the owner retains the ability to maintain possession of the art. With works of art facing an increase in value across the board, an increase in interest in putting art in a trust to shelter the appreciation and then renting it back has pursued. Though an owner’s first instinct might be to lock his work in a trust and then rent it out for only a dollar, the fact is that determining a fair market rent price for art is much more difficult than it is for real estate, primarily because the market is much more limited. The Internal Revenue Service (IRS) highly concerns itself with rent prices for artwork held in a trust, and a price that is clearly too low can constitute a clear violation of trustee duties and responsibilities. Regardless, a reasonable rent price allows for art collectors to save money, as the cost of renting will be significantly lower than the tax liability his estate will incur if he neglects to account for the artwork in an estate plan.
In short, it is imperative that your estate plan accounts for all of your assets, including any valuable artwork you may own. Failing to include your artwork may result in familial conflict down the line if the assets are distributed unfairly, as well as a higher tax liability on your heirs than if you were to lock your artwork in an irrevocable trust. If you happen to own any valuable pieces of artwork, consult with a licensed estate planning attorney who can guide you through establishing an estate plan that accounts for your collection and can help minimize the future estate tax burden on your heirs.