Estate Planning

Fellow apraiser Marcus Wardell, ISA AM sent me an interesting post from Wealth Management on estate planning.  It is a recap of an early November panel discussion held at Bonham's in NYC. It discusses common mistakes, donating, gifting and selling, appraisals and communications.

It is great they include appraisals and discuss how they are necessary in establishing basis. The section on discussions with next generation family members is also interesting. Well worth reading.

Wealth Management reports

On Nov. 1 at Bonhams in New York City, Susan R. Lipp, Trusts & Estates editor-in-chief, moderated a panel discussion on “Estate-Planning Strategies for Art and Collectibles.” Panelists Sherri Cohen, vice president, director of valuations, Trusts & Estates at Bonhams, Warren K. Racusin, a partner and chair of the trusts and estates group at Lowenstein Sandler LLP in New York City, and Diana Wierbicki, partner and global head of art law at Withersworldwide in New York City, discussed the various options available to clients regarding planning for art disposition, the need for appraisals and the importance of communicating one’s wishes with the next generation. Below are some highlights from the panel’s presentation.

Common Mistakes

“Intentional planning is the most important issue to address with your clients,” Cohen began. By putting together a professional team, considering all the options (sell, donate, gift, bequeath) and appointing a trustee who’s capable, familiar, has a solid background and knows how to hire experts, you can avoid some of the common mistakes clients tend to make.

The biggest mistake collectors make is not looking at the “big picture.” According to Wierbicki, “Looking holistically at how to dispose of a collection is critical,” because not only is a collection valuable but also “the individual pieces are ‘passion assets.’” That is, collectors are often attached to their art because they may have personally known the artist who created a piece, or they may have had the piece hanging on their walls for decades. Cohen cautioned: “When working with clients who have valuable collections, make sure you also address how the client is maintaining his assets.” For example, clients with valuable wine collections must make sure their wine is stored properly; for clients with paintings, they must make arrangements in advance regarding how the pieces will be moved upon disposition. Also consider the issue of restoration and how it will affect a sales price.

Racusin noted that, “[t]ypically, collectors are good with acquisitions but often make mistakes regarding the four methods of disposing their art.” Those methods are:

Selling: The major issue to consider in the sale of art is income tax. There’s a 28 percent capital gains tax on sale of art, plus other taxes. This higher capital gains tax is a reality that a seller has to face. There are strategies to consider, however, to deal with the higher capital gains tax. One option is for a collector to sell his art to a grantor trust in which there’s no income tax. A collector can also swap a work of art for another work of art. However, it’s important to remember that Internal Revenue Code Section 1031 (like-kind exchanges) has been repealed, so capital gains taxes will have to be paid.

Donating: A collector can donate his art to a charitable remainder trust (which is exempt from income tax), and instruct the CRT to sell the art. If a collector chooses to donate his art, he’ll need to consider whether to donate his art during life or at death. If he chooses to donate his art at death, it’s important to detail where paintings should be displayed and what the plaques accompanying the pieces should look like and say. The more details in a donation agreement, the better. And, don’t forget to address with your clients the issue of deaccession.

Gifting: A collector can also gift her art and take advantage of the current federal lifetime exemption of $11.18 million. But, she must consider the issue of basis, remembering that the grantee will get the carryover basis.

Bequeathing: Bequeathing is another option, particularly for married collectors who can bequeath the art to a spouse and use the unlimited marital exemption. Remember, also, that there’ll be a step-up in basis.

Selling Options

If an owner, estate or beneficiary wants to sell the art, options include auction, private sale or taking out a loan to buy some time. Often, an auction is a quick way to sell work in a collection. But, a client must consider: (1) how to make sure everything gets sold (all price points); and (2) how to make sure the terms of an auction agreement are specified. As an example, does the auction agreement specify an enhanced hammer option or a guarantee option? Wierbicki noted that, “[w]hen working with collectors, ask how they feel about disposing their art at auction. Which approach do they want their executor to take? The key is to speak to your client ahead of time and understand what he wants to do.” It’s also imperative to understand the market in which the items will be sold.

Public sales often work well from a fiduciary’s standpoint. If your client opts for the auction route, consider what type of auction house is the better fit for the art. Smaller regional auction houses? Online auctions? Every estate has different potential and types of property, so the timing of the auction is also important.

Finally, if your client is limited by the timing of auctions, the client or the estate can consider taking out a bank loan to avoid rushing into a sale.

Appraisals

Appraisals are necessary to establish basis. Cohen advised that, “[w]hen securing an appraisal, consider what the appraisal will be used for. Will it be used for a sale? Or, will it be used in the context of individual family members wanting different items from the decedent’s estate?”

Also, examine what the different kinds of appraisals are and the valuations that are available. Consider insurance appraisals, which look at similar properties and are driven by risk tolerance and volatility in the markets. There are also fair market value appraisals, which look at the price a willing buyer, under no compulsion to buy, would give to a willing seller. Regarding value, for estate tax purposes, the relevant time period will be comparables on the collector’s date of death.

Communication to Next-Gen Family Members

“The greatest single reason for litigation within a family is lack of communication,” stated Racusin. Parents must be transparent about their reasons for disposing of their art and ascertain their children’s preferences. If parents want to dispose of their art, the first question to the children should be: “Do you want this stuff?” Because these are passion assets; if a piece is bequeathed to a family member who doesn’t want to keep it and instead wants to sell it, there will undoubtedly be litigation. Some children want to preserve a collection to honor their parents; other children may like only certain pieces in their parents’ collection; and still other children may be interested in just the collection’s value. Understanding what all of the family members want is critical to a smooth disposition.

The key is to craft provisions or mechanisms before disposition to ensure fairness and avoid battles. Parents can suggest a lottery, employ “draw straw” provisions, have coin flips—any mechanism to decide how assets will be divided will go a long way to avoiding a family fight. The key is to establish some process.

Some families have conversations with their children and memorialize those conversations in written documents. Cohen suggested that, “[i]f discussions are recorded in a document, make sure your client revisits these conversations every few years, because the value of art changes over time and the split among the children should be updated to reflect such fluctuations in value.” Also, remember to keep records: invoices, purchase agreements, bills of sale, documents regarding where pieces are on exhibit, etc. Keeping a running record will be enormously valuable after a collector dies.

Source: Wealth Management 

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