Collectors spend decades building collections of not only art but also vintage cars, watches and antiques, and just when a collection becomes really encyclopedic and cohesive—usually when the collector is in their 60s or 70s—the focus suddenly becomes how to get rid of it. Estate planning requires high-net-worth individuals to do something with their assets, of which art and other collectibles are a part, in order that their heirs are not saddled with objects they may not want and inheritance taxes they certainly will not want to pay. And if they have to pay inheritance taxes—up to 40 percent, depending upon the value of the estate—heirs generally prefer to be bequeathed cash rather than objects that they themselves may need to sell, which then occasions the payment of hefty capital gains taxes.
Maybe some museum will want the art collection, landing it somewhere and permitting the collector to claim a charitable deduction for it, but maybe it won’t, because many institutions’ collections have outgrown their gallery spaces. (Or the paintings and sculptures in question are simply duplicative.) “Art can be a very emotional asset,” Sarah Constantine, a partner in the Manhattan law firm of Arnold & Porter, told Observer, and those emotions can get triggered by hearing that a collection isn’t of interest to next of kin or isn’t good enough for a museum and, actually, is an obligation to be dealt with rather than an heirloom to be cherished.
Constantine, like many legal, banking and art advisors, begins to have conversations with collectors about what to do with their assets, including their art collections, as they approach retirement or after they no longer are working. Sometimes those conversations include heirs, so she has a sense of how to advise her clients. “I have conversations with the beneficiaries,” she said, “thinking through with them that dad would like you to have this piece. Is this something you’re interested in? If you’re not interested, is there another piece you’re interested in?”
Once she knows the intentions and preferences of the next of kin, she begins to negotiate with the parent. “You never want to force an heir to receive an asset they don’t want. If they want the asset, that’s great. They can keep it and enjoy it. If they don’t want the asset, but they don’t want to hurt dad’s feelings, they can always take the asset and sell it at a later date. What you don’t want to do is have dad give the asset to the child and put some kind of restriction against selling it for 10 years.” She added that she’s never had a client actually include such a provision, but she’s had to convince clients not to put one in.
One of the first things that Suzanne Gyorgy, a partner in Emigrant Bank Fine Art, recommends to her clients is that they obtain an appraisal of their collections, in part to have a fuller understanding of their entire estate. The federal exemption for estates, the amount that may pass tax-free to heirs, is currently $15 million and expected to rise in coming years, and understanding where one stands helps “to avoid strife in the family.” Heirs may want individual works from a parent’s collection, but the difference in the value of individual pieces can be large. “One heir may want the Monet, while another wants the Degas,” she said, “but perhaps the price of Monets has soared since the work was purchased, while the prices of Degas have not. You don’t want disputes about one person getting more than another, but having an updated appraisal will help calm potential disputes.”
Michael Duffy, head of art planning at Merrill Lynch, has found that many clients with collections worth $10 million or more—often much more—want to donate their collections to museums or bequeath them to heirs. “Selling is a dirty word for collectors,” he told Observer. “Most people have only bought, they’ve never sold and, if they did, they’ve sold very, very few pieces. The concept is foreign to them.” Still, he pushes the idea, since many, if not most, museums only want top pieces and many of the objects in privately held collections are not at that level. Plus, some items are what he calls “an early mistake, something someone purchased 30 years ago but wouldn’t buy today.” Selling lower-interest, lower-quality objects while holding onto the top pieces that would be of greatest interest to museums is a collector’s best chance to achieve some of what they want.
“I often tell clients that, generally, your children want your money and not your stuff,” he said. “Chances are they may want one or two pieces for emotional reasons, but if you pass something to them, they’re likely to fire-sale it as soon as they get their hands on it and may not produce the top dollar that you could have produced if you had had the opportunity to sell that item during your lifetime, knowing the market and knowing where you got it.”
He recommends clients sort through their collections to identify what is top tier, middle tier and lower-interest material. When the focus is on selling lesser materials, Duffy noted, concerns about having to pay capital gains taxes are reduced, since these items may not sell or, if they do, “probably not at a gain.”
Donating art to a museum is certainly an option, although objects might need to be shopped to various institutions to determine what museums may want or not want and to create the best match between collector and institution. Marnie Grossman, a partner in the New York City law firm McDermott Will & Schulte, told Observer that she will arrange for discussions between the two sides and to create opportunities “to view the collection during a client’s lifetime both so that there is a match between the client and the museum and so that specific desires of the client can be included in a gift agreement.”
If there is interest, negotiations can begin over where the artworks will be displayed (or whether they will largely be kept in storage) and how the label will read. An offer of cash accompanying the gift of objects can cover the costs of any future conservation, thereby sweetening the deal.
There are other, more complicated choices that collectors may make, some of which solve problems while others create them. One of the latter, Constantine said, is bequests of artwork to next of kin in which the objects will be jointly owned, which would limit resentment of heirs that one person got more value than the other. Still, potential problems await. “So now brother and sister own the Monet 50-50. What happens? Can you sell 50 percent interest in your Monet? And if so, who’s buying it if your sibling doesn’t want to buy it from you? And so you can get locked into this structure where you’re jointly owning a very expensive property and you can’t get out, or you’re just not going to be able to get the liquidity out of it you would want if you want to sell and your sibling doesn’t.”
Another option is to place some or all of the collection’s artworks in a trust, which takes these assets (and their value) out of the estate and allows heirs to determine what should happen to them at a later date. Until then, the art remains in, and can be enjoyed by, the family. Another benefit of a trust is that the artworks belong to the trust, rather than to the individual heirs. This is important because if a married son has a Picasso from the trust on his walls, that Picasso does not become marital property if there is a divorce.
Still, it’s never that simple. Someone still has to pay for any conservation work needed by the art owned by the trust, as well as for fine art insurance, and who pays needs to be laid out in the language establishing the trust. If artworks are bequeathed to more than one heir, Duffy said, it’s a good idea to state in writing “how long a beneficiary can have a piece of art in their house.” Wills, after all, are intended to resolve potential issues, not create new problems.
And yet given all that, Grossman noted, art collections still often end up on the auction block: “I often see clients selling art at death because it has often greatly appreciated in value and it is a good source of liquidity for paying taxes, especially if they have other illiquid investments like private equity that are not as easily monetized. When I create estate plans with significant art, I like to leave open the option for selling the art in case there is a need for liquidity.”
Conversations between collectors and their financial advisors can be difficult, but perhaps less so than a generation ago, Gyorgy concluded. “I think there’s just so much information about the art market. People are much more aware of value when it comes to art rather than 20 years ago, when it was really much more of a passionate asset. I guess one of the upsides of the financialization of the art market is that value is discussed more and so people are more aware.”
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