It is said that beauty is in the eye of the beholder. But what if that beauty is captured in the form of artwork? Even more to the point, how do you decide ownership when the artwork is part of an estate?
A recent Wall Street Journal article, titled "Tips for Dividing Art in a Divorce or Death," warns that fighting can be avoided if art lovers and their loved ones learn a little bit about legal and tax basics.
The original article offers some ideas on how to decide—in a fair and civilized manner—who gets what, and the various option for disbursing an art collection to minimize taxes.
First, after an art collector dies—before anyone starts eyeing their walls for a new masterpiece—the entire estate must be finalized in probate court. This does does not happen overnight (and may take several years). If the art is in the home of the decedent and that home is not occupied, be sure to upgrade the security system or consider transferring the art to a climate-controlled fine-art storage facility.
Note: None of the art should be removed before the court-approved distribution, and the decisions about the art should be part of the overall estate planning. Remember, while art passing at death is subject to a step-up in value for tax purposes, all artwork will need to be appraised professionally.
Even if an art collector specifies who gets what, there still may be problems. For instance, if a collector wills a painting to one person and gives everything else to another, the second individual will be responsible for paying the estate tax for the painting if taxes are to be paid out of the "residue". Alternatively, the original article suggests that the will should specify that each heir pay his or her share of taxes on the assets received.
For a person who dies in the current year (2014) there is a federal estate tax threshold of $5.34 million, so an estate worth less than that has no federal estate tax liability. However, the original article reminds us that you only need one Picasso or Warhol to put you over that line and make your estate taxable. This tax could be as much as 40%! To make matters worse, some states also tax up to 20% above a $1 million threshold.
The original article also describes how collectors will sometimes sell art to help defray anticipated estate taxes. Alternatively, you should read the original article and talk to your estate planning attorney about setting up a tax-exempt charitable trust and gift artwork into the same.
If there is a Degas in your dining room or maybe a Dali in your den, speak to an experienced estate planning attorney about a strategy to pass your collection to your family in the most prudent manner.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website.
Reference: Wall Street Journal (Sept. 21, 2014) "Tips for Dividing Art in a Divorce or Death"