Art is a unique asset class. [Understatement]
Since its value is in the eye of the beholder, valuing art is an art in and of itself.
Things can really get tricky, however, when gifting and planning an estate with artworks.
Enter The New York Times and its recentarticle titled “Estate Planning Can Get Tricky When Art Is Concerned.”
As you would expect from The Times in matters of art and culture, the article adroitly addresses this subject, noting that there are specialist advisers who serve the art world and its unique estate planning issues, to include those related to tax, legal concerns and philanthropy.
I guess you could say the art expertise of these specialists is really “a niche within that niche,” since they fulfill a different role from art advisers who help clients find works of specific artists based on their tastes, budget, and the state of the market.
Interestingly, the fact that art is so very difficult to value can work to the benefit of art investors.
If you are selling, then you want the value to be high. On the other hand, if the art is being included in your estate at death, then you want that value to be low.
Either way, it is essential that you engage an independent appraiser because the IRS has its own appraisers!
Another benefit of a bona fide appraisal is when you gift art to loved ones. This helps establish the tax basis should they ever part with (sell) your velvet Elvis collection (just kidding). If you cannot establish basis, then it is zero.
The original article also delves into some finer points of making your art work for you.
For example, financial planning for art collectors can involve certain techniques for transferring ownership of art without transferring the art itself.
These techniques include selling art to heirs for cash or a note, placing it in trust or even a corporation ... then leasing it back.
If you go down those rather complex roads, make sure you are working with an attorney experienced in these matters.
Because there may be tax advantages to be sure, but results may vary based on governing state and national law. I understand the whole program may not survive the tax man without the attending leasing agreement.
Trusts or corporations can also help collectors and their heirs avoid what the article calls tragically bad luck defined as dying in a location with a particularly onerous estate tax.
What if your art is located in the U.S., but you are not a U.S. taxpayer?
At your death, your art will be subject to U.S. estate taxation because it is physically here.
Good news: Good planning can avoid such a bad result.
What about philanthropic art collectors?
In the best of all worlds they would like to donate their artwork to a charity, get a tax break and maintain ownership of the artwork. Actually, they can get kinda close.
An example cited in the original article notes that under American law a collector can allow the institution to use the work for part of each year and take a prorated charitable deduction based on its value. However, the collector has to give up all ownership and control of the artwork within 10 years or at death, whichever comes first.
As you can see, whether it is matters of the heart or your velvet Elvis art, engage an experienced estate planning attorney early in the process.
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), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: The New York Times (October 3, 2015) “Estate Planning Can Get Tricky When Art Is Concerned”