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Estate Planning for Your Works of Art; Elder Law Attorney Woodstock, Georgia


Art investors are nearly always advised not to invest in art at all, but to collect it. Buy what you like, the conventional wisdom goes, not what you expect to increase in value. But collectors still must contemplate financial matters, especially related to inheritance, advisers say. It’s essential for them to consider what will happen to their art when they are no longer around to appreciate it. “As somebody’s art portfolio gets more valuable, it becomes a more significant item in their financial and tax lives,” said Michael Delgass, managing director of Sontag Advisory, a financial planning firm in New York. Like collecting itself, the planning surrounding it has tangible and intangible aspects, especially involving legacy issues, Mr. Delgass said. There are often unpleasant tax consequences for heirs, who may not be related to the collector and who may not be connoisseurs if they are. “If you have a very valuable art collection, you may feel responsibility to the public to preserve it,” he said. Meanwhile, “It’s not a given that just because you love it, your kids will love it. Do you want to allocate family resources to hold that forever?”

The New York Times article, titled “Estate Planning Can Get Tricky When Art Is Concerned,” explains that that there are specialist advisers to handle these issues, concentrating on tax and legal concerns in elder law, estate planning and philanthropy. Their art expertise is typically “a niche within that niche.” They fill a different role from art advisers who help clients find works of specific artists based on their tastes, budget, and the state of the market.

Because it’s tough to put a price on art, that can work to investors’ favor when doing elder law or estate planning. While it isn’t an asset that’s going to solve lifestyle or retirement goals, it has a distinct advantage as a wealth-transfer tool. If you’d like to pass your Monet to your kids, it’s better if it’s valued as low as possible because transfers to heirs are taxed at high rates in many countries (but the dollar figure usually has to be pretty big for the tax to kick in). Use an independent appraiser and remember that rules on valuation and tax treatment vary from country to country.

A lack of liquidity can help in elder law and estate planning, but it can also hurt. When you sell your stock, the transaction is recorded in a public market, but when you give that Picasso to your lucky kids, it may create a taxable event which will one day catch up with the new owners.

Transference of property should be documented properly to avoid major issues down the line.

Financial planning for collectors can involve certain techniques for transferring ownership of art without transferring the art itself. For example, collectors can sell art to heirs for cash or a promise to pay—or place it in a trust or similar entity like a corporation—then lease it back. These strategies can have tax advantages, but are based on the laws of the state and country. Experts say that without the leasing agreement, these types of arrangements may not survive scrutiny by the tax authorities.

Trusts or corporations can also help collectors and their heirs avoid what the article calls “tragically bad luck” as many tax codes say that the property is subject to estate tax wherever it is situated when the owner dies. So if an asset is located in the U.S. but you’re not a U.S. taxpayer, when you die it will be subject to U.S. estate tax because it’s physically here. Good planning can avoid such a result.

Collectors wanting to donate to a charity and get a tax break while maintaining ownership of a piece of art (at least for a while) may be able to lend the work to an institution or remain a part-owner and donate the rest. Under American law, a collector can allow the institution to use the artwork for part of each year and take a prorated charitable deduction based on its value. However, the collector has to give away the artwork entirely within 10 years or at death, whichever comes first. The tax deduction is based on the value then or when the fractional interest was donated, whichever is lower. And penalties are due if deductions are found to have been excessive.

Talk to your elder law attorney if you have some Picassos or Monets that you plan to give to your children. He or she will be able to work through the details and make sure it’s done legally and with the least amount of tax impact.

Reference: The New York Times (October 3, 2015) “Estate Planning Can Get Tricky When Art Is Concerned”

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