Estate Planning with Art
Art—whether rare paintings, photographs, sculptures, or other tangible works—is one of the hardest assets to estate plan for. The main reason why incorporating art into estate plans is difficult is because art is a very emotional asset, those who amass a substantial assortment of art are collectors not distributors, and cash flow complications.
For true collectors, art is an emotional asset as it requires someone to go out looking for a piece and purchase one that they are extremely passionate about. Further, as collecting art quickly goes from a unique way to decorate your home to a type of lifestyle, those who choose to purchase high-end art do not want to sell or part with these valuable assets. Finally, most types of trusts or estate plans work best when the assets located in these accounts generate some kind of revenue to pay estate planning and other relevant fees. This can present issues as art does not generate revenue, but instead can require a substantial amount of money to maintain.
While art is a complicated asset to estate plan for, after someone passes away, art is treated like any other asset and can either be sold, gifted, or donated. Below is a discussion of the pros and cons you can gain from selling, gifting, or donating your art collection.
The first thing to know about selling art is that it is better from a tax perspective to sell your collection after you pass away instead of selling it while you are alive. The main reason why selling art while you are alive is not a good idea is because of the current 28 percent capital gains tax, state-specific income tax, plus a potential 40 percent estate tax. When combining all of these separate taxes, your heirs may only be receiving 30 – 40 percent of the actual value of your art.
Thus, if you are planning on selling any of your art collection, it is better to wait until death to sell, so that income tax considerations are removed from the equation. Further, in some cases, because of the current step-up tax rate, your heirs may be able to avoid most estate taxes. Finally, an added bonus of waiting to sell your art until you pass away is that you can continue to enjoy the entirety of your collection for the rest of your life.
Another option available to art collectors is giving away their collection to family, friends, or charities. Currently, gift taxes and estate taxes are the same rate. However, the way we calculate gift taxes makes this option cheaper than estate taxes. Another difference between selling and gifting art is that it is better to gift art while you are still alive. The reason it is better to gift art while you are still alive is that you will pay a lower effective tax rate while also giving away future appreciation of the asset. Thus, from a tax point of view, it is smarter to give art away sooner rather than later.
The last option those with large art collections can choose is to donate their art to charities. Art can be extremely expensive and when considering the taxes associated with selling art, it can be awfully expensive to get rid of. One way art collectors avoid tax issues is to donate their collection to a museum or other non-profit. For some, donating their entire collection to one organization makes them feel good because they know that their collection will stay together. However, other collectors may desire to spread their gift as far as possible so opt to donate a few pieces of art to multiple organizations.
While donating art after you pass away is still a good option, if you donate art while you are living, you will be able to reap the benefit of great tax deductions. While there are a lot of rules and regulations you must follow, if done correctly, you can gain an income tax deduction that can equal 30 percent of your gross income. Further, you have a five-year carryforward for anything that is excess over the current year’s income.
Finally, you must make sure that you follow the “related-use rule.” This rule states that when you donate something, it is actually going to a charity that is going to use it as part of its tax-exempt purpose. The best way to ensure that you follow this rule is to discuss what the charity is going to use your art for and then have them create a receipt for you.
While there are three distinct ways that you can transfer your art, you can choose to use all three of these options or only one. However, when estate planning for art, there are a lot of substantiation rules and appraisal rules so you must ensure that your advisor team understands and can follow each of these rules.
For more information regarding DC, Maryland, or Virginia estate planning, contact us at 202-803-5676. You can also directly schedule a consultation with one of our skilled attorneys. Additionally, for general information regarding trust and estate law, check out our blog.