“Each time you purchase a piece of art, you’re investing in a piece of history and in another person’s life.
~Diane Overmyer, Artist
Every December, tens of thousands of artists, art galleries, art lovers and investors from around the world converge for Art Basel Miami Beach
, one of the most prestigious art shows worldwide. Whether investing in art
for love, money, or both, collectors of all types of art and collectibles should incorporate their collections into their overall estate plans
. This article will discuss important considerations for art collectors in planning for the acquisition and disposition of their fine art and collectibles.
Discuss Your Collection With Your Heirs
From time to time, my mother asks whether there are any specific items her children want to receive under my parent’s estate plan
. I once told her that I always adored the Edgar Berebi stemware she buys for my father every Christmas, birthday and Father’s Day. Truth be told, he must have more than thirty pieces. When my sister found out about my selection, she gasped, wishing that she had thought of the stemware, because of the money she would have made when she sold them.
Contrary to what many collectors may think, their heirs may have no interest in preserving their collection, whether it be fine art, jewelry, gems, collectibles or antiques (collectively referred to in this article as “art”). While some feel an emotional involvement with their collections, others view them as disposable assets akin to stocks, bonds, and real estate. Thus the first step in art succession planning
is discussing your wishes regarding your collection with your heirs. If maintaining the integrity of your collection is important to both parties, then an estate planning attorney can implement the disposition of your collection to your heirs in a comprehensive estate and gifting plan
. If, however, your heirs are not interested in preserving your collection, there are several charitable planning techniques
that can not only keep your collection intact but can also generate substantial income, gift and estate tax benefits
Art Collector vs. Art Dealer
As a starting point, generally, art collectors who are not art creators fall under one of two designations: dealer or collector. An art dealer is a person who buys and sells art to the public in the ordinary course of a trade or business, and therefore the art is held as inventory rather than as an investment. When an art dealer sells a work of art, he or she recognizes ordinary income and does not receive any special tax rate on any gain (capital gain
). On the other hand, when a collector sells a work of art, it generally generates a capital gain. The remainder of this article will only discuss charitable planning with art
in the hands of an art collector.
Income Tax Benefits & The Related Use Rule
When art that is contributed is long term capital gain property
(held for one year or more), the charitable contribution will qualify for a fair market value income deduction
for federal income tax purposes, provided the contribution meets the related-use rule, which requires that the charity use the art in a manner consistent with the charity’s exempt purpose. Otherwise, the deduction will be limited to the donor’s cost basis (generally what the donor paid for the art), or fair market value if it is less than the cost basis.
For example, if a painting contributed to an educational institution is used by that organization for educational purposes by being placed in its library for display and study by art students, the use is a related use; but if the painting is sold and the proceeds used by the organization for educational purposes, the use of the property is an unrelated use. The regulations provide that a contribution of art meets the related-use rule
if: (i) the donor establishes that the artwork is not in fact put to an unrelated use by the donee charity; or (ii) at the time of the contribution, it is reasonable to anticipate that the artwork will not be put to an unrelated use by the charity.
Other Charitable Gifting Strategies
. The Internal Revenue Code
permits many other exciting charitable planning techniques for art and collectibles, including, for example:
Fractional Interest Gifts of Artwork.
For example, if a donor gives a museum a 1/2 interest in a painting, then he or she will be entitled to an income tax charitable deduction
equal to the value of 1/2 of the paintings and will be able to display the painting in his or her home for half of the year, with the painting residing at the museum for the other half of the year. The expectation of most museums, as well as the Internal Revenue Service
, however, is that the artwork will eventually belong exclusively to the organization to which the initial fractional interest was donated.
Charitable Remainder Trusts (“CRT”)
Generally, CRTs provide for the eventual transfer of trust property to charity after the property has been held for a period of time to generate an income stream for one or more non-charitable beneficiaries
. If appreciated artwork is contributed to a properly structured CRT
, in addition to a current income tax deduction
, the trustee can sell the artwork without recognizing capital gain. This technique is beneficial for donors seeking to convert an illiquid asset (e.g. a work of art) into an income-producing asset without recognizing capital gain.
Importance of Inventory & Appraisals
Whether for love, money, or both, after acquiring objects, collectors must take care of them. Be sure to maintain an up-to-date inventory of your art, antiques, and collectibles, including a qualified appraisal and valuation. Keep track of changes whenever you buy or sell art, loan or gift a piece to another person or entity or structure a gift to charity, and always ensure your collection against loss or damage.
1.) In the case of a contribution of art to a museum, if the object donated is of a type normally retained by such museum or other museums for museum purposes, it generally will be reasonable for the donor to anticipate that the object will not be put to an unrelated use by the museum, whether or not the object is later sold or exchanged by the museum.
2.) The Internal Revenue Code requires a donor to recapture the charitable contribution deduction
by including it in income if both of the following statements are true: (1) the donor contributed a fractional interest in tangible personal property after August 17, 2006, and (ii) the donor does not contribute the rest of his/her interests in the property to a qualified organization on or before the earlier of the date that is 10 years after the date of the initial contribution or the date of the donor’s death. If the donor must recapture the deduction, he/she must also pay interest and an additional tax equal to 10% of the amount recaptured.
*This article was originally published in IT. Italian Trade Magazine
2010 and some content may be subject to new IRS rules and regulations.
**CIRCULAR 230 DISCLAIMER
: Unless the above article (“this article”) expressly provides that the statements contained therein (“the statements”) are intended to constitute written tax advice within the meaning of IRS Circular 230 §10.37, the author intends by this article to communicate general information for discussion purposes only, and you should not, therefore, interpret the statements to be written tax advice or rely on the statements for any purpose.