HOW TO MAKE AN ESTATE PLAN
Collecting art is less about documents and appraisals and more about passion and a genuine love of the craft. If you’re feeling behind on the management of your art collection, you’re not alone.
Many art collectors do not consider their art collection as a part of their will until a later stage. When you decide to plan the future of your art collection and your estate, you have a few options that we will review.
The first step, before you choose where your art will go, is to gather all the appropriate provenance documents such as appraisals and bills of sale.
We heard from Mark Van Mourick, president of the wealth management firm Optivest, Inc., on how to start planning your art estate. “It is important to properly catalog, photograph, appraise and insure your collection,” Mourick says.
How To Discuss Your Art Estate Plan with Your Family
One of the harder conversations to have is discussing the future of your art collection with your children or relatives. This is difficult for two reasons. The first being, that no one wants to discuss or prepare for when you are gone. The second being that there is a chance your heirs are not interested in maintaining your art collection, but selling it.
“Have a candid conversation with each child about which pieces have sentimental value to you and to them,” Mourick suggests. “Phrase the question in a way that gives them freedom to respond honestly and remember not to get offended by their response.”
Once you have established how your family members feel about your art collection, you can begin making plans for the future. The goal of creating an art estate is to ensure that your collection is taken care of and in a place that makes you feel comfortable.
“It is good to establish who you trust to appraise the collection and/or sell it upon your death (if your heirs do not want it),” Mourick elaborates. “These advisors can assist in their areas of expertise and relieve the family of a potential burden after your passing.”
WHEN PLANNING YOUR ESTATE
YOU HAVE THREE OPTIONS:
Sell Your Collection
Selling art is more expensive than selling other assets. The capital gains tax on art and collectibles is 28% opposed to the usual 20%.
You will also be responsible for paying a sales commission, taxes, and possibly shipping. If you know your family is interested in selling all or parts of your collection, it’s best if you are a part of the planning process. Your family may not be aware of the pricing of your art collection. If the pieces are sent to an auction, they could be sold at much lower than market value. Secondly, you want to have a say in the next person or organization that will care of a part of, or all of, your collection.
If the decision to sell is made after you pass, then the capital gains tax is usually reduced or eliminated. However, the entire value will be included in the estate for estate tax purposes. Selling your art is likely the most expensive process of the three options. Speaking with an estate planning attorney will help you weigh the pros and cons. If donating would result in a higher return on investment, via a tax deduction, you can be involved in where the artwork is donated.
Leave Your Artwork to Your Heirs in an LLC
You may leave an entire collection or specific pieces to certain people in your will. Your heirs, although likely your family, do not need to be blood related. The technical term for heirs is a “non-charitable beneficiary.” You may leave your assets to whomever you choose based on any number of criteria. Include your collection resources with your inventory, such as appraisers, insurance agents, framing experts, gallerists, and any historians or specialists in your collection. The most important thing about leaving your artwork to specific people is giving them the resources to properly maintain it.
Transferring your artwork to an LLC is an alternate way to leave your artwork to your heirs. This will put the entire collection into the LLC, which can be left to multiple people. The family members included will then be responsible for the collection as a conglomerate. For instance if they decide to sell one piece, they will split the profits evenly. This is how you can avoid choosing specific pieces for specific family members, and having the artwork’s value get in the way.
When leaving your family members an LLC, they own the interests rather than the art itself. You may select one or more managers, which will be your heirs in this case, to control the art. The managers are usually responsible for maintaining appropriate insurance, display, storage, and making decisions regarding the sales of individual pieces. You will also want to leave collection resources and information with the LLC managers to aid in any sales, restoration, or maintenance.
Donate Your Artwork
If you choose to donate your art to a museum or charitable organization before you pass, you are entitled to an income tax deduction of up to 30% of your adjusted gross income. This is based on the value of the work at the time of the gift.
Donating your art to a museum upon your death is likely the simplest option. Your collection is delivered to the institution and your estate receives a tax deduction based on the current valuation.
In either scenario, it’s up to you to specify any requests.
Some collectors request that their art be displayed in a specific wing, or have their name included next to the description, for example. These conditions should be articulated and agreed upon before any artwork is transferred. Arduous conditions could jeopardize the charitable deduction for income and tax purposes, or they can ultimately reduce the value of the collection.
GETTING STARTED DONATING YOUR ARTWORK
Downsizing an art collection is an important part of managing your assets, and there are a number of reasons that could influence you to donate your artwork.
Once you have all your provenance documents in place and are ready to donate, you have a lot of research to do. Here are a few things to consider:
Note That Museums Do Not Accept All Gifts, and Not All Museums Accept Gifts
Donating art is a two-sided decision. Museums generally have a committee that reviews gifts and decides whether they are a positive addition to their current collection. Even if your gift is accepted, it is possible that it will be brought to storage and not displayed. You might only be comfortable donating the art on the condition that it is on display. You may also have specific requirements for the display such as including your name or seeing your piece in a certain wing. It is necessary that you specify this in the donation agreement.
Learn Which Museums Only Accept Unconditional Gifts
An unconditional gift means there are no stipulations the museum has to abide by, such as displaying the artwork in a specific wing. You must also prepare for the fact that an unconditional gift could result in a sale on the museum’s behalf. When you agree to donate the piece as an unconditional gift, you are giving up all rights to the artwork. The Museum of Modern Art in New York, for example, only accepts unconditional gifts.
This is also called “unrestricted status.” Museums generally prefer that donations come in with zero requirements. This means, your piece can be displayed wherever the museum chooses, stored wherever and whenever, or sold at any time.
Understand that You Are No Longer the Owner
When donating your art, you may feel like the museum is your partner. After thoroughly researching your options and agreeing to relinquish a treasured item, it’s natural to feel this way. However, as a donor it is important to understand the relationship that the museum is willing to participate in.
Unfortunately, it is possible that the museum is not willing to support any relationship. The museum may take the donation and forgo any further communication about the piece.
At the time of the donation, you may be informed of where the piece will be displayed and for how long. Curators usually have a good idea of the plan for a new piece of art. Things change. When coming from a private collection and starting to work with a larger institution, new management and goals can affect the future of your piece. Once you have donated the artwork, the exhibit may change or your piece may be moved into storage. Regardless, you have positively contributed to the museum’s collection.
Know Your Collection May Be Split Up
In the event of a large donation, understandably, you want the grouping of your art to be respected. You curated your collection with intention. Especially when choosing a museum with a similar taste, you may assume that your pieces will be displayed together. This is not always the case.
The museum also may only accept parts of your intended group gift. Although you’re hoping to keep certain pieces together, the museum may only be interested in specific works.
Consult the Experts to Learn Your Tax Implications
Any donation above $5,000 needs to be reviewed by the Internal Revenue Service. Make sure you consult with your tax attorney and file the appropriate forms. Be sure the value is up-to-date and done by an experienced appraiser.
Consider Donating to a Charity
If you are looking to donate art and are not concerned with its whereabouts, you can donate to a charity. There are many charities that accept art donations. The art will likely be sold at the values in a donation. You also want to be sure that you receive the correct, and most beneficial, tax deduction.
WHAT YOU NEED TO KNOW ABOUT LENDING ART
There are times when being an art collector is about giving. Times, for instance, when the public gets to see a piece of art they never would have witnessed had you not lent it to a museum.
Lending your art to a museum or gallery has many positives. You get to share your passion and art collection with the community, increase your contacts in the art world, and may even be eligible for a tax break. It’s also a great way to keep your art safe and cared for, if you no longer have room on your walls.
Like most things, there are also risks involved. Your art will be traveling and could be damaged in transit, and is entering the hands of another, outside of your protection. Understanding the benefits and risks of lending your art will help you make an informed decision on whether it’s the right move for you and your art collection.
Here are 9 points to consider when lending your art to a museum or gallery:
Prepare a Comprehensive Loan Agreement
The loan agreement is your contract, naming you the owner of the art and specifying the details of the loan. This is where you can outline the dates you agree to loan out the work, the location (i.e. the borrower), the title(s), and the specific exhibit, if relevant.
You’ll also want the most recent appraisal values and condition reports in the loan agreement. This will ensure you are compensated in the case of damage or theft. If you have any display requirements, make sure these are in ink as well. The loan insurance, usually provided by the museum, will also be outlined in the loan agreement. Store this agreement along with any appraisal value documents and condition reports alongside your piece(s).
Secure the Right Insurance
In addition to your personal fine art insurance, the museum should also provide a specific insurance plan. This should be door-to-door, also known as “wall-to-wall,” coverage. Meaning the artwork is covered for any restorations or the most recent appraisal value from the moment it leaves your house until the time it’s safely back in your home.
Art insurance specialist Victoria Edwards of Wasserman & Associates Insurance Agency, LLC gave us her input on securing coverage when lending your art. “You want to make sure there is door-to-door coverage,” Edwards advised, “so when they pick the painting up at your house it is covered in transit, at the museum, and back home.” You should also make sure that you are named as the loss payee in any sort of damage.
Know How to Ship Your Art
Any shipping damage should be covered in your insurance policy. However, a condition report of each piece before any of your art goes into transit. This way you are protected from any new damage and reimbursed for any accidents.
According to shipping and storage expert Derek Smith, President of AXIS Fine Art Installation, UPS and FedEx insurance policies specifically exclude artwork in the fine print. Even if you purchase insurance through them, it will not cover fine art.
Consult a conservator for packing and shipping protocols for your specific type of artwork. They have experience in shipping and restoration, meaning they know how to prevent the damage of a piece.
Save on Storage
Lending your art to a museum is usually free. If your art collection is becoming larger than you can display, lending your artwork is an option before outfitting an at-home storage space or paying a monthly storage unit bill.
Consider It a Charitable Contribution and a Learning Opportunity
Although you’re not donating your collection for good, remember that you’re contributing to an exhibit that benefits the community. By lending your art to a museum, you are sharing your passion for art with the public. Additionally, this can be a wonderful opportunity to learn more about your piece, because
the museum will provide scholarly details. By being a part of a specific exhibit or museum collection, the community can learn more about an artist you love, and you might learn something too.
Research Possible Tax Benefits
You might be asking: “If it’s a charitable contribution, is there a tax benefit involved?”
Specific to each state, it’s worth consulting a tax attorney on any possible tax benefits for lending your art to a gallery. There have been instances of collectors purchasing high-priced art and lending the artworks to museums in order to avoid being taxed on the asset.
As the lender, you should be informed of any tax breaks that you may want to utilize and address them in the loan agreement.
Understand You May Owe Taxes
Varying state by state, some fine art may be subject to a “use tax” when lent to a gallery or used in any other way. For example, if the Washington state use tax is not paid upon the purchase of goods, then the use tax is due when the goods are brought to Washington. Washington’s use tax is the same rate as their sales tax, 6.5 percent, and is calculated using the value of the goods when they enter the state. This would be relevant if you purchased fine art in California and wanted to lend it to a museum or gallery in Washington.
Anything tax related is going to be state specific. Generally, you should be aware that your art insurance representatives, attorneys, and the museum or borrower are responsible for notifying you of all possible tax breaks or bills. And it’s your job to be proactive.
Protect Yourself from Seizure
You want to make sure that your art cannot be brought to the court of law for any reason. This could happen for something as simple as an ownership dispute, when the bill of sale is not accessible. The United States’ Statute 22 protects objects that are culturally significant or of national interest from governmental seizure. Any non-profit museum, cultural, or educational institution may apply to the U.S. Department of state to determine if the artwork or object is protected under Statute 22. This will immunize the object from the judicial process.
If you are loaning your artwork abroad, be sure it is protected under a similar clause. That way it cannot be seized regarding any confusion over its authenticity, owner, or other concerns.
Stipulate Your Requirements
It is your responsibility to outline any specific requests and requirements in the loan agreement. For instance, whether you want your name to be displayed with the piece or where you would like to see it in the museum. Although contracts can be tedious, operate with a fierce attention to detail when putting together your loan agreement. We recommend starting with a list of wants and fears and then consulting with your insurance agent or estate planning attorney to help you address these all in the loan agreement.
Loaning parts of your art collection is a great way to give back to the community and share your love of art. Getting involved with the museums will also connect you with their resources, conservators, and curators who have a wealth of information when it comes to further defining and developing your art collection, purchases, and special care instructions.