SPECIAL ESTATE PLANNING CONSIDERATIONS FOR ART AND OTHER COLLECTIONS
July 16, 2020
Special Estate Planning Considerations for Art and Other Collections
Many people have collections about which they are quite passionate: The collections may be very valuable, for example, art collections, coins, stamps, or designer handbags, or they may have more sentimental than monetary value, such as political bumper stickers, postcards, or rocks. Regardless of its dollar value, if you have a collection, it should be included in your estate plan. You should make arrangements in advance to ensure that the collection is handled in the way you want, and if it is worth a lot of money, that its value is maximized. The following are a few steps you should take to ensure your wishes for your collection are followed:
Collect relevant documentation. If you have a valuable collection, it is important to create a catalog describing each piece, including photographs, bills of sale, and appraisals. If you have an insurance policy covering some or all of your collection, it should be kept with your important documents as well.
Discuss your collection with your family members and loved ones. Although you may have invested a lot of time and money in your collection, and may have a strong emotional attachment to it, it is not unusual for family members not to share a collector’s passion about his or her collection. Try to understand their perspective if this is the case in your family. It is important to discuss this with them to ensure that your estate plan is designed to minimize the burden your family could face in dealing with the collection when you pass away. However, it is also important to find out from your family members if anyone would like to inherit certain pieces or the collection as a whole. If more than one person would like to receive certain items, it is prudent to figure out a reasonable solution in advance. This will help to avoid conflict between family members after you pass away.
Pass it on to loved ones. As mentioned above, your family members may not be as attached to your collection as you are. If you do pass the collection on to them, consider giving them your permission to sell or donate it. If one or more family members is interested in keeping the collection, consider whether to also provide a cash gift to help those beneficiaries with the costs of maintaining it. If the collection is one of your more valuable assets, take steps to ensure that other beneficiaries receive an equivalent inheritance, for example, by making them the beneficiaries of a life insurance policy. Alternatively, you could consider transferring your entire collection to a trust or a limited liability company that could manage the collection for the benefit of multiple generations.
Donate your collection to a museum or charitable organization. It is important to check with the organization to which you plan to donate the collection to make sure that it is able to handle housing or selling it, both of which could involve more expense than you might expect. Such organizations may request that a donation of cash accompany the bequest to offset the cost of maintaining the collection. Keep in mind that only a donation to a public charity will be tax deductible by your estate (or you, if you make a lifetime gift), and there are certain circumstances when even donations to a public charity will not be deductible.
Sell the collection. If you would like your family to sell your collection or anticipate that they will sell it, it will be helpful to them and likely minimize delays if you provide the names of dealers or auction companies that specialize in the type of collection you have, as this type of information may not be as easy to find for those who are not collectors. In addition, appoint an executor who is knowledgeable about the collection and its value. This will prevent the collection from being sold for much less than its actual value.
Consider the tax implications. The Taxpayer Relief Act of 1997 lowered the maximum capital gains rate on gains from the sale of most assets to 20 percent but left the maximum rate on gains from the sale of collectibles at 28 percent. If you pass your collection on to a child or other beneficiary when you pass away, that person will have a tax basis in the property based on the value on the date of your death (i.e., a stepped-up basis). This will be the basis used to determine the amount of taxable gain and income tax the beneficiary must pay if the beneficiary eventually sells some or all of the items in the collection. As a result, if your collection has increased in value over time, your beneficiary’s tax bill will be lower if you wait until your death to gift the collection to them rather than making a lifetime gift—in that case, their basis would be the amount you originally paid, resulting in a larger taxable gain. On the other hand, if the collection has not increased in value, you could consider taking advantage of the annual or lifetime gift tax exclusions to make outright gifts of your collection while you are still living.
Make sure it is properly valued. Appraisals are particularly important, as they will help your executor, trustee, and family members determine the value of the collection. Be sure to use an appraiser knowledgeable about the particular type of items in your collection. This will ensure that these items are not sold for a price far below their actual worth or donated because of a lack of knowledge of their true value. Also, it will help you to make decisions about how to provide equitable gifts to your beneficiaries and whether to make gifts from your collection during your life or at death.
Under federal tax laws, if the value of your collection exceeds a certain level, the estate must obtain an official appraisal for valuation purposes that will provide a value as of the date of your death. According to the IRS, a collectible includes works of art, rugs, antiques, any metal or gem (with exceptions), any stamp or coin (with exceptions), valuable alcoholic beverages or any other tangible personal property that the IRS determines is a “collectible” under I.R.C. Section 408(m). The IRS defines the fair market value of art and collectibles as the price at which the property could change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts. If the collectibles have marked artistic or intrinsic value of a total value in excess of $3,000 (e.g., jewelry, furs, silverware, paintings, etchings, engravings, antiques, books, statuary, vases, oriental rugs, coin or stamp collections), the appraisal of an expert or experts, under oath, shall be filed with the estate tax return along with a statement by the executor that the list of collectibles is complete and the appraiser(s) are qualified. In addition to the factors discussed above, determining the value of your collection is important to avoid tax penalties for undervaluing or overvaluing the size of your estate.
We Can Help You Design a Plan for Your Special Collection
Your collection likely means a lot to you. It also adds another level of complexity to your estate plan. We can help you think through your goals for your collection and develop an estate plan that will allow you to rest assured that your collection will be handled according to your wishes, even after you pass away. Call us today to schedule a meeting: We are more than happy to consult with you by phone or videoconference if you prefer.
 I.R.C. § 408(m)(2).
 26 CFR 20-2031-1(b).
 26 CFR 20.2031-6(b).