While art’s ultimate value lies in the feeling it creates in the owner, its financial worth is equally important when planning one’s estate. Art collections can be an especially complex part of your overall legacy, being difficult to value and subject to numerous legal and tax implications. Be strategic: include your art collection in your estate plan. You don’t have to be ultra-wealthy for this to be worthwhile. Here are ten steps to ensure that your art legacy is passed to future generations according to your wishes.
Understand Why Estate Planning Matters
Creating an estate plan for your art collection will empower you to take an active role in the future of your collection. By addressing both the artistic and financial aspects of the collection, it will protect your family from possible future disputes over the division of these assets. Apart from making you a more informed collector, estate planning for your art collection will ensure that your artistic vision survives over time.
Create Your Collection Plan
The estate plan in your will should clearly identify all the beneficiaries for each piece in the collection, whether family members or other individuals, whether the collection is to be sold in part or in full before or after your death or whether it will be donated to a museum or other organization. Art usually falls in the Other Assets provisions of a will, which can also include collectibles such as antique cars, jewellery, rare books etc.
Choose your Executor
You may choose an executor for your entire estate or specifically name an art executor (someone who understands the art market) or an advisory group of experts. The executor should be organized, responsible, diplomatic, and considered neutral by all the parties.
Establish Clear Ownership
Carefully consider the legal implications of your estate plan. Most important is to establish clear ownership of each work. Who owns each piece? Couples and families often buy things together, so this may be unclear from just the purchase documents. Who owns each work now? Who will own it after your death?
Document the Collection
The best way to start planning the estate to create detailed documentation of the works in the collection in a digital art inventory database (which is better than a spreadsheet or paper records). Each piece should have its own record, including photographs of the front and back, appraisals and purchase records. The archive should describe each work through its medium, dimensions, signature, date of creation, condition, purchase price, provenance, and ownership records.
Establish the Collection’s Value: Obtain an Appraisal
The greater the value of the collection, the greater the need for documentation and appraisal. A thorough inventory will be useful in determining the collection’s insurance value and fair market value, as well as forming the basis for the estate plan. Undergoing this process will also make you a more informed collector and help you decide exactly how to deal with your estate. An independent appraisal is required for any taxable transfer that will be donated, gifted, or goes through the estate administrative process. It is very possible that the fair market value at the time of disposition will be very different than the original purchase price. An up-to-date appraisal will certainly be required after death, to establish the distribution value. The appraiser must be independent and should have experience in the market and type of art in the collection. It is the estate executor’s responsibility to report all the assets and their correct fair market value.
Involve Your Family
It is very important to discuss your estate plan with family members and other heirs. Art is difficult to divide equally among heirs if the collection is not to be sold. It is not uncommon to learn that not all heirs want your art. Having these difficult conversations now can create a common understanding of your current wishes and prevent conflicts among your heirs after your death. If liquidating the collection, consider holding an auction through an auction house.
Understand Tax Implications
Understanding the tax implications, both during your lifetime and after your death, should be an important consideration in making your estate planning decisions. Whenever a collector sells a work of art, they may be subject to a Capital Gains Tax if the value has increased. Likewise, if the value of you collection has increased significantly over your lifetime, your heirs may face a substantial capital gains tax bill. However, there is no guarantee that the overall collection will have increased in value; some works may have seen increases, others not. Thus, the need for an appraisal. Estate Tax is owed upon the transfer of the property after death; and art collections are often subject to estate tax, which can be as high as 40% of the collection’s value.
To lower or minimize capital gains and estate taxes for your heirs, you may consider establishing a trust to manage the collection outside of the remainder of the estate and give you more direct control over the future of the collection. Trustees can be given the power to seek expert advice and can be given a specific mandate regarding the disposition of the collection. The collection can be kept together or dispersed to specified heirs, and/or be sold or donated according to your exact wishes.
Consider Charitable Giving
Another option to minimize taxes is to donate all or part of the collection to a museum or other non-profit organization that may exhibit and care for the artwork in perpetuity. Because this will be a cost for the recipient, they may also ask for a cash bequest to cover the costs of caring for the collection. However, do not assume that a particular institution has the capacity, collecting mandate or space to accept your collection. Approach the curator or collection manager in advance to determine their interest and requirements.
To ensure that your cherished art collection is preserved and distributed according to your wishes, invest in creating an estate plan for your collection, considering the legal requirements, tax implications and donation options that are available. Develop a clear plan, document and appraise the collection, and involve your family members and beneficiaries to ensure your collection is enjoyed by future generations.
At Axis Art Projects, we understand the importance of estate planning for art collectors and can provide expert advice best suited to the particular requirements of your unique collection. Please contact us here Art Consultant Toronto.