The Art of Artwork: Selling, bestowing to loved ones or donating to charity

When creating or evaluating an estate plan, some assets are more difficult to account for than others. Consider your art collection to be one of these more challenging assets. If you own any artwork, such as paintings, sculptures, or other works, they are likely appreciating assets and may make up a considerable portion of your estate. The following are some possibilities for effectively including your art collection in your estate plan. 

Get a specialized evaluation 

It is crucial to evaluate your collection regularly by an expert. The frequency will vary depending on the kind of art you collect, but in general, it is best to get an evaluation at least every three years, if not every year. Frequent evaluations help you foresee future tax repercussions and give you a sense of how the collection's value is increasing. Additionally, an appraisal by a qualified appraiser is necessary for taxation purposes for most art donations, gifts, or inheritances. 

Create a catalogue of your collection by taking pictures and collecting all appraisals, bills of sale, insurance policies and other documents that can establish its history and provenance. The receiver or recipients of your collection will require these materials. 

It can be donated, sold or bestowed 

Your estate plan generally has three alternatives for how to handle your art collection: sell it, bestow it to your loved ones or give it to a charity. Let's examine each alternative in more detail. 

To sell or not to sell, that is the question 

If you decide to sell, bear in mind that the highest tax rate on long-term capital gains on artworks and other “collectibles” is 28%, as opposed to 20% for other types of assets. There is an additional 3.8% net investment income tax, plus a seller’s commission on the art sale. It might be better to incorporate the collection into your estate in order to benefit from the stepped-up basis than to sell it while still alive. Your heirs will be able to pay less or no tax at all thanks to the greater basis. For instance, you may bestow the collection to a trust and give the trustee instructions to sell it, invest the proceeds or give them to your loved ones.  

Make it a family heirloom 

You can opt to leave your collection to your heirs if you want to keep it within the family. This is especially true if your heirs have a particular passion for the type of art you collect or a special fondness for certain pieces. There is no guarantee, however, that the works of art will be maintained and handled carefully according to any specific requests you make by family members. A superior strategy may be to entrust the collection to a trust, LLC or other organization, with specific instructions on how to take care of it and to designate a qualified trustee or manager to oversee collection upkeep and display, as well as sale and purchase decisions. 

When you give, you get 

Giving away your collection can be a smart strategy for safeguarding it for future generations while avoiding capital gains and inheritance taxes. It also permits you to claim a charitable tax deduction for yourself or your estate. However, the approach must be handled delicately. For instance, the artwork must be donated to a public charity, such as a museum, rather than a private foundation to maximize the charitable deduction. Additionally, the recipient's use of the artwork must be relevant to its tax-exempt purpose. If the art or collectible is donated to a charitable organization that does not use the item as part of its charitable purpose, your deduction is limited to the lesser of cost basis or fair market value. There are also lower income limitations that apply when gifting appreciated property. 

If you want to enjoy the benefit of having the artwork in your home as well as the benefit of a charitable deduction, consider gifting a fractional interest. In order to qualify a gift as a fractional interest, the recipient charity is given the right, as a tenant-in-common owner with the donor of the property for a portion of each year, appropriate to its interest. The charity must use the artwork in connection with its exempt purpose. Your initial charitable deduction will be the fair market value of the property, multiplied by the fractional interest contributed. Future contributions will yield a charitable deduction determined by the lower of the fair market value at the time of the additional gift or at the time of the initial contribution, multiplied by the additional fractional interest contributed. You must contribute the entire interest to the same donee on or before the earlier of the date ten years from the initial fractional contribution or the date of your demise (“specified period”). Otherwise, there is an income inclusion in the year in which the specified period occurs in the amount that was previously deducted, plus interest and a 10% penalty. 

Furthermore, you must agree on the terms with the receiver prior to delivering the items if you want to attach any conditions to the donation.  

It's crucial to have a conversation with the intended beneficiaries before leaving your collection to loved ones or donating it to a charity. It's important to discuss and make informed decisions during your lifetime, so you will have time to make other provisions if your family isn't keen on receiving or overseeing your collection, or if your charitable benefactor has no use for it. 

Happy collecting! 

For many people, pieces of art are more than just possessions. Collectors may be unwilling to part with their collections since they wish to enjoy displaying these pieces in their homes. A major goal of estate planning is to minimize gift and estate taxes by removing appreciating assets from your estate as soon as possible. 

Plan your estate wisely to include your current and upcoming artwork in your will in the best possible way. 

When creating or evaluating an estate plan, some assets are more difficult to account for than others. Consider your art collection to be one of these more challenging assets. If you own any artwork, such as paintings, sculptures, or other works, they are likely appreciating assets and may make up a considerable portion of your estate. The following are some possibilities for effectively including your art collection in your estate plan. 

Get a specialized evaluation 

It is crucial to evaluate your collection regularly by an expert. The frequency will vary depending on the kind of art you collect, but in general, it is best to get an evaluation at least every three years, if not every year. Frequent evaluations help you foresee future tax repercussions and give you a sense of how the collection's value is increasing. Additionally, an appraisal by a qualified appraiser is necessary for taxation purposes for most art donations, gifts, or inheritances. 

Create a catalogue of your collection by taking pictures and collecting all appraisals, bills of sale, insurance policies and other documents that can establish its history and provenance. The receiver or recipients of your collection will require these materials. 

It can be donated, sold or bestowed 

Your estate plan generally has three alternatives for how to handle your art collection: sell it, bestow it to your loved ones or give it to a charity. Let's examine each alternative in more detail. 

To sell or not to sell, that is the question 

If you decide to sell, bear in mind that the highest tax rate on long-term capital gains on artworks and other “collectibles” is 28%, as opposed to 20% for other types of assets. There is an additional 3.8% net investment income tax, plus a seller’s commission on the art sale. It might be better to incorporate the collection into your estate in order to benefit from the stepped-up basis than to sell it while still alive. Your heirs will be able to pay less or no tax at all thanks to the greater basis. For instance, you may bestow the collection to a trust and give the trustee instructions to sell it, invest the proceeds or give them to your loved ones.  

Make it a family heirloom 

You can opt to leave your collection to your heirs if you want to keep it within the family. This is especially true if your heirs have a particular passion for the type of art you collect or a special fondness for certain pieces. There is no guarantee, however, that the works of art will be maintained and handled carefully according to any specific requests you make by family members. A superior strategy may be to entrust the collection to a trust, LLC or other organization, with specific instructions on how to take care of it and to designate a qualified trustee or manager to oversee collection upkeep and display, as well as sale and purchase decisions. 

When you give, you get 

Giving away your collection can be a smart strategy for safeguarding it for future generations while avoiding capital gains and inheritance taxes. It also permits you to claim a charitable tax deduction for yourself or your estate. However, the approach must be handled delicately. For instance, the artwork must be donated to a public charity, such as a museum, rather than a private foundation to maximize the charitable deduction. Additionally, the recipient's use of the artwork must be relevant to its tax-exempt purpose. If the art or collectible is donated to a charitable organization that does not use the item as part of its charitable purpose, your deduction is limited to the lesser of cost basis or fair market value. There are also lower income limitations that apply when gifting appreciated property. 

If you want to enjoy the benefit of having the artwork in your home as well as the benefit of a charitable deduction, consider gifting a fractional interest. In order to qualify a gift as a fractional interest, the recipient charity is given the right, as a tenant-in-common owner with the donor of the property for a portion of each year, appropriate to its interest. The charity must use the artwork in connection with its exempt purpose. Your initial charitable deduction will be the fair market value of the property, multiplied by the fractional interest contributed. Future contributions will yield a charitable deduction determined by the lower of the fair market value at the time of the additional gift or at the time of the initial contribution, multiplied by the additional fractional interest contributed. You must contribute the entire interest to the same donee on or before the earlier of the date ten years from the initial fractional contribution or the date of your demise (“specified period”). Otherwise, there is an income inclusion in the year in which the specified period occurs in the amount that was previously deducted, plus interest and a 10% penalty. 

Furthermore, you must agree on the terms with the receiver prior to delivering the items if you want to attach any conditions to the donation.  

It's crucial to have a conversation with the intended beneficiaries before leaving your collection to loved ones or donating it to a charity. It's important to discuss and make informed decisions during your lifetime, so you will have time to make other provisions if your family isn't keen on receiving or overseeing your collection, or if your charitable benefactor has no use for it. 

Happy collecting! 

For many people, pieces of art are more than just possessions. Collectors may be unwilling to part with their collections since they wish to enjoy displaying these pieces in their homes. A major goal of estate planning is to minimize gift and estate taxes by removing appreciating assets from your estate as soon as possible. 

Plan your estate wisely to include your current and upcoming artwork in your will in the best possible way.