24 THE ARTIST’S ESTATE
Estate planning should begin during the artist’s lifetime with the assistance of a lawyer and, if necessary, a life insurance agent and an officer of a bank’s trusts and estates department. Artists, like other taxpayers, seek to dispose of their assets to the people and institutions of their choice, while reducing income taxes during life and estate taxes after death. But artists must take special care with their estate planning because of the unique nature of artworks and the manner of valuing artworks at death for the purposes of determining the value of the estate on which the appropriate estate tax rate will be levied. This chapter cannot substitute for consultation and careful planning with the professional advisors mentioned above, but it can at least alert the artist to matters of importance that will make the artist a more effective participant in the process of planning the estate.
The artworks are unique because they are the creation of the artist and possess aesthetic qualities not found in other goods that pass through an estate. The artist may wish to control the completion, repairs, reproductions, exhibitions, and sales of the works even after death.
Integrity of the Art
David Smith, for example, during his life condemned a purchaser of one of his painted metal sculptures who removed the paint from the sculpture after purchase. Smith branded this “willful vandalism” and considered the work a ruin that he repudiated as “60 lbs. of scrap steel.”
Smith, in his will, had carefully selected as his executors the critic Clement Greenberg, the painter Robert Motherwell, and the attorney Ira Lowe. Yet after Smith’s death, these executors permitted important changes in some of the works remaining in the estate. Circle and Box, a work originally painted white, was stripped and apparently varnished. Primo Piano III, also white, was repainted brown. Another work, Rebecca’s Circle, was permitted to deteriorate and rust.
Unauthorized Reproductions
Another important aesthetic control is that exercised by executors (or beneficiaries, if the copyrights are bequeathed with the works, once the distribution of estate assets occurs) over reproductions of the artist’s work. If a painter usually authorized the sale of photographic reproductions of paintings, the executors may confidently continue to do so. Serious questions arise, however, as commercial offers to reproduce and profit from the art reach into areas in which the artist never authorized reproductions. If the painter permitted photographic reproductions, would reproductions on tee shirts, jewelry, plates, or potholders be permissible? The executors are bound to conserve the assets of the estate, so these offers are tempting. Indeed, a failure to accept a lucrative offer might even be argued to be a wasting of the assets of the estate. But the executors must deal as well with the intangible factors of the artist’s wishes and reputation.
A not uncommon event is the authorization of reproductions by the beneficiaries who receive the work. For example, the heirs of sculptor Julio Gonzalez allowed posthumous bronze replicas of the sculptures to be cast and sold. Not only had Gonzalez always used iron as the material for his sculptures, but in some cases the bronze replicas were sold without any indication of their being made posthumously. An even more egregious example involved lithographs supposedly executed by Renoir. The entrepreneur exploiting Renoir’s name advertised “authentic Renoir lithographs.” The prospectus for purchasers advised:
You have been selected as one of a very limited number of collectors in the United States, South America, and Japan to receive notice of this unique opportunity to possess a Renoir…. Starting with the original lithograph stones left by his grandfather, Paul Renoir…personally supervised every step in the creation of each lithograph (from mixing the colors, to finally embossing the only official Renoir signature and Atelier Renoir Seal).
Each lithograph, priced at $375, was stated to be part of a limited, numbered edition of 250. The United States Attorney intervened, however, and the entrepreneur agreed in a court stipulation to send a letter to all purchasers of the lithographs telling a very different story:
The lithograph you purchased is part of a limited edition of 250 and was authorized by Paul Renoir, grandson of the French Impressionist painter Pierre Auguste Renoir. However, the master himself had nothing to do with its creation. The lithographs are reproductions of oil paintings done by Pierre Auguste Renoir. They were executed in 1972.
The lithographs did not start with original lithographic stones left by Renoir, but rather with paintings never made into lithographs during Renoir’s lifetime. Surely an artist has a right to more respectful treatment by those who posthumously wield power over the artist’s creations.
To prevent situations such as these from arising, the will of Jacques Lipchitz, for example, provided:
These terra-cotta and plaster models are the prime of my inspiration, my only true original work, and are the most precious property I possess. It is my desire that no reproductions of any sort except photographs be made from said terra-cotta and plaster models.
Exhibitions
Executors must also stand in for the artist by objecting to any exhibition of work the artist would have sought to prevent. Mark Rothko, for example, had strong preferences as to the manner in which his paintings were displayed. Considering both atmosphere and the placement of paintings important, he canceled a commission to paint murals for the Seagram Building when he learned they were to hang in the Four Seasons Restaurant.
The artist, while alive, can prevent such inappropriate exhibitions or, at least, object to them if the work is owned by another party. But for executors to act as the artist would have in objecting to inappropriate exhibitions of work requires an unusual joining of sensitivity and determination.
Artists and collectors often bequeath art to museums. The reasons for this vary widely: to benefit a worthy institution, to perpetuate the donor’s name, and to gain a federal estate tax deduction. If such a bequest is of large magnitude, the museum may accept it despite restrictions that require a certain manner or frequency of exhibition. Thus, the Lehman Collection in The Metropolitan Museum of Art in New York is housed in rooms like those that held the art in the collector’s own home, and the collection is always on display.
Others who have given substantial quantities of art have not been as fortunate in having their restrictions observed. Adelaide deGroot, a collector who died in 1967, donated much of her art to The Metropolitan with the express request that any art not kept by The Metropolitan be given to other museums. Correctly interpreting this restriction as merely a wish that was not legally binding, The Metropolitan began selling and trading paintings from the deGroot bequest in the early 1970s. The Metropolitan considered its collection improved by these actions, but the moral issue of violating the intent of the bequest remains.
Museums have even ignored or evaded restrictions that were intended to be legally binding. Another collector, Benjamin Altman, required in his will that The Metropolitan exhibit his bequest in two rooms of suitable size, one room for his Chinese porcelains and the other room for his paintings (which would hang in a single row on the wall, not one above another). No other art would be exhibited in the rooms. Altman stated in his will that the bequest would be forfeited if the restrictions were violated and the art would go to an Altman Museum of Art, for which funds had been set aside. After his death, however, the agreed-upon two rooms gave way to an arrangement of Altman’s art through several galleries. Altman’s executors failed to prevent this. Likewise, the executors of the Michael Friedman estate agreed to permit The Metropolitan to disperse his collection throughout the entire museum although the bequest was conditioned on the collection being kept separate and intact.
While in these cases the wishes of collectors were disregarded, the artist bequeathing work to a museum or similar cultural institution is in the same position as the collector. Unless the artist’s executors possess both the sensitivity and the will to resist abuse of the artist’s intentions, the artist can expect no better treatment than these collectors received. This concern prompted the agreement discussed on pages 234–235 between Hans Hofmann and the University of California regarding the exhibition and disposition of Hofmann’s work to be received by the university. Less prominent artists might seek similar understandings with local universities and cultural institutions.
Precipitous Sale of Works
An artist’s reputation is often built through a carefully designed program of sales, with both prices and the prestige of the purchasers orchestrated to rise ever higher. Litigation over the Mark Rothko estate revealed that the painter had been extremely concerned with his reputation as an artist. When he died, Rothko owned 798 paintings, many from his early Surrealist period. His decision to own these paintings and sell them gradually, if at all, was a decision of great importance to his reputation. He had, like David Smith, carefully chosen his executors to maintain this course and achieve a balancing of backgrounds and talents: Bernard Reis, an accountant, Theodoros Stamos, a painter, and Morton Levine, an anthropologist.
Yet these executors entered into highly controversial contracts to sell outright to the Marlborough Galleries one hundred paintings for $1,800,000 to be paid over twelve years and to consign to the Marlborough Galleries another 698 paintings at a commission rate of 50 percent, which many people considered too high for works by an artist of Rothko’s reputation. Both these contracts were executed only three months after Rothko’s death. Not only could this bulk transaction have been interpreted as the executors lacking confidence in Rothko’s future reputation and sales potential, but the contracts were also made on very unfavorable terms. Rothko’s heirs commenced a complex, bitter, and costly legal struggle, which was joined by the New York Attorney General because a substantial part of the estate had been left to the Mark Rothko Foundation. The court rescinded the contracts and awarded damages of $9,252,000 against the executors, Marlborough Galleries, and the owner of Marlborough Galleries (one of the executors was liable only for the lesser amounts of $6,464,880).
These examples could be multiplied, but their import for the artist is that lifetime planning is a necessity if the artist has concern for the posthumous artistic and financial treatment to which the work passing through the estate will be subject.
The Will
A properly drafted will is crucial to any estate plan. A will is a written document, signed and witnessed under strictly observed formalities, which provides for the disposition of the property belonging to the maker of the will on his or her death. If the maker wishes to change the will, this can be done either by adding a codicil to the will or by drafting and signing a completely new will. If no will is made, property passes at death by the laws of intestacy. These laws vary from state to state, but generally provide for the property to pass to the artist’s spouse and other relatives. An administrator, often a relative, is appointed by the court to manage the estate. An artist’s failure to make a will concedes that the artist will not attempt to govern the distribution, aesthetic standards, or financial exploitation of the work after death.
A will offers the opportunity to distribute property to specific persons. For artworks, this usually is done by bequest either to specific individuals or to a class. A bequest means a transfer of property under a will, while a gift is used to mean a transfer of property during the life of the person who gives the property. An example of a bequest to a specific individual would be:
I give and bequeath to my son John Artist, who resides at _____________________________________________________________, the oil painting created by me, titled __________________________ and dated ________________________, if he should survive me.
An example of a bequest to a class would be:
I give and bequeath to my son John, my daughter June, and my daughter Mary, or the survivors or survivor of them if any shall predecease me, all my paintings, sculptures, and other artworks, except such articles specifically disposed of by Paragraphs ____________________ of this Will. If they shall be unable to agree upon a division of the said property, my son John shall have the first choice, my daughter June shall have the second choice, and my daughter Mary shall have the third choice, the said choices to continue in that order so long as any of them desire to make a selection.
Copyrights, of course, can also be willed. For example:
I give and bequeath all my right, title, and interest in and to my copyrights (describe which copyrights) and any royalties therefrom and the right to a renewal and extension of the said copyrights in such works to my daughter June.
The right of termination under the copyright law effective in 1978 provides that the artist’s copyrights passing by his or her own will cannot be terminated. Also, the right of termination cannot be passed by will but automatically goes to the artist’s surviving spouse, children, and grandchildren.
Use of a will permits: (1) the payment of estate taxes in such a way that each recipient will not have any taxes assessed against the work received, (2) the uninterrupted maintenance of insurance policies for the works, and (3) the payment of storage and shipping costs so the recipient need not pay to receive the work. The estate taxes are usually paid from the residuary of the estate, the residuary being all the property not specifically distributed elsewhere in the will.
Choosing Executors
The will allows an artist to choose the executor or executors of an estate. Since decisions of the executors were the focal points of the controversies as to the alterations of David Smith’s work and the sale of Mark Rothko’s work, the importance of choosing suitable executors cannot be emphasized too strongly. Yet both Smith and Rothko had chosen as executors men whom the artists knew and trusted and chose in part to achieve a diversity of backgrounds. Smith chose a critic, an artist, and a lawyer. Rothko chose an anthropologist, an artist, and an accountant. Each estate had, at least in theory, the benefit of both artistic and financial expertise. Yet the failure of the executors to continue dealing with the artworks as the artists would have intended is a warning to every artist, regardless of the size of the estate, who seeks to plan what will become of work after his or her death.
The College Art Association, a national organization with a membership of diverse art professionals, has issued guidelines, applicable to unethical bronze castings, which can be given a wider scope. “Sculptors should leave clear and complete written instructions or put into their wills their desires with respect to the future of their works after their death or in the event of their incapacity to continue working.” All artists, as well as sculptors, should take such precautions.
If necessary, the artist’s wishes can be written into a will to specify how the artworks are to be repaired, reproduced, exhibited, and sold. This may conflict, however, with the usually desirable practice of giving to the executor the maximum powers for management of the estate. Each estate, whether large or small, will require a decision by the artist as to executors and their powers, based on the unique facts of the artist’s own situation. At the least, however, the College Art Association states, “All heirs and executors of the sculptor’s estate should be scrupulous in discharging their responsibilities and when necessary consult with experts on such questions as those of new castings,” or, it can be added, artistic questions generally.
The executor, especially for a small estate, will often be a spouse or close relative. It is important, however, to be certain that such a person will be capable of making the necessary artistic and financial decisions for the estate. Joint executors, particularly when one is an art expert and the other a financial expert, would seem well suited to run the estate. For example, the determination to sell bronze castings of an iron sculpture is a decision with both artistic and financial implications. The extent to which the artist may safely restrict the discretion of the executors as to artistic matters may depend upon other aspects of the estate, such as whether sufficient funds are available to pay estate taxes and meet the immediate needs of the estate. Only by resolving problems such as these can the artist be certain the executors will act as the artist would have wished.
Some artists divide the duties between executors, so that one executor handles general financial matters while an Art Executor handles issues pertaining to the art. Because financial and art issues are likely to be woven together in an artist’s estate, the duties of the Art Executor have to be carefully delineated, along with specific provisions to resolve disputes between the Executor and the Art Executor. Such a clause might read as follows:
I appoint _______________ to be the literary and artistic executor of my estate (hereinafter referred to as my “Art Executor”), to have custody of, act with respect to, and be empowered to make all determinations concerning the use, disposition, retention, and control of the art that I have created or own, my letters, correspondence, documents, private papers, writings, manuscripts, and all other literary and artistic property of any kind created by me, whether or not any such items are unfinished or are completed but not yet divulged to the public.
Although this clause seems to give the Art Executor absolute power over the art, what would happen if the art had to be sold in order to pay taxes? Because this is quite likely to happen, the will should indicate that the Executor’s power to gather and dispose of the estate assets takes precedence over the Art Executor’s power to decide whether to retain or dispose of art.
Estate Taxes
The will also offers the opportunity to anticipate and control the amount of taxes to be levied by the state and, more importantly, the federal government. Reforms in the tax laws have benefited artists by removing the tax burden from many estates.
If artworks are scattered among a number of states—for example, on long-term museum loans or perhaps long-term gallery consignments—the estate plan can avoid the vexing problem of multiple state estate proceedings by gathering such works in the state where the artist permanently resides. An artist who lives in more than one state may risk having a so-called double domicile and being taxed by more than one state, but careful planning can avoid such a danger.
The artist will also wish to benefit from a number of deductions, discussed below, that can substantially reduce the estate if planned for properly. But tax planning is especially necessary for the artist because artworks are valued at fair market value in computing the artist’s gross estate.
Trusts
Trusts are a valuable estate-planning device in which title to property is given to a trustee to use the property or income from the property for the benefit of certain named beneficiaries. Trusts can be created by the artist during life or, at death, by will. Trusts can also be revocable—subject, that is, to dissolution by the creator of the trust—or irrevocable, in which case the creator cannot dissolve the trust. An excellent guide to trusts, including the frequently used living trust, is Your Living Trust and Estate Plan by Harvey Platt (Allworth Press). Trusts are frequently used to skip a generation of taxes, for example, by giving the income of a trust to children for their lives and having the grandchildren receive the principal. In such a case, the principal would not be included in the estates of the children for purposes of estate taxation. The tax law, however, severely restricts the effectiveness of generation-skipping trusts and other transfers for a similar purpose.
If the artist is concerned that the recipients, perhaps minor children, will not be in a position to make decisions regarding the art, trusts can be created in order to let the trustees fill this decision-making role. The artist can certainly create a trust (or foundation, as Mark Rothko did in his will) while alive, so that the capacity of the trustees can be evaluated.
The Gross Estate
The gross estate includes the value of all the property in which the artist had an ownership interest at the time of death. Complex rules, depending on the specific circumstances of each case, cover the inclusion in the gross estate of such items as life insurance proceeds, property that the artist transferred within three years of death and in which the artist retained some interest, property over which the artist possessed a general power to appoint an owner, annuities, jointly held interests, and the value of property in trusts.
The property included in the artist’s gross estate is valued at fair market value as of the date of death or, if so chosen on the estate tax return, as of an alternate date six months after death. Fair market value is the price at which the property would change hands between a willing buyer and a willing seller, if both had reasonable knowledge of relevant facts and were under no compulsion to buy or sell.
Expert appraisers are used to determine fair market value of artworks. But whether an estate is large or small, the opinions of experts can exhibit surprising variations. Because of this, the Internal Revenue Service in 1968 created an Art Advisory Panel, composed of art experts representing museums, universities, and dealers, to determine for income, estate, and gift tax purposes whether or not privately obtained appraisals of fair market value were realistic. While the Panel’s reports are only advisory, local IRS district offices tend to consider the reports binding. The success of the Art Advisory Panel led the IRS to create an Art Print Panel in 1980, which operates in a similar manner to the Art Advisory Panel but deals only with art prints.
Estate of David Smith is an example of the extremes that are possible in appraisals of fair market value. When David Smith died at age fifty-nine in an automobile accident, he still owned 425 of his metal sculptures, many of substantial size and weight and located at Bolton Landing, New York. Smith had never had great success financially during his life. He sold only seventy-five works during the entire period from 1940 to his death in 1965. He insisted on maintaining high prices and the size of much of the work also limited possible buyers. In the two years after his death, sales soared and sixty-eight works were sold for nearly $1,000,000.
Smith’s executors, in attempting to determine fair market value, first estimated the retail price of each piece individually if sold on the date of death. The total for the 425 works was $4,284,000, which the executors then discounted by 75 percent because any sale made immediately would have to be in bulk at a substantial discount. This figure was further reduced by one-third to cover commissions that would be paid to the Marlborough Galleries. The executors concluded that the fair market value of the 425 sculptures was therefore $714,000. The Internal Revenue Service, however, disagreed that any discounting should be allowed and simply placed a fair market value of $4,284,000 on the works.
The tax court considered numerous factors related to fair market value, such as the market effect of a bulk sale, Smith’s growing reputation, the lack of general market acceptance of nonrepresentational sculpture, the quality of the works, sales, prices paid immediately before and after death, and the inaccessibility of the 291 works located at Bolton Landing. Terming its decision “Solomon-like,” the tax court found the fair market value of the 425 sculptures to be $2,700,000 as of the date of Smith’s death (Estate of David Smith, 57 T.C. 650, acquiesced in, I.R.B. 1974-27). This is approximately the figure that would result if the values argued for by the executors and the Internal Revenue Service were added together and then divided in half. This is certainly not scientific, but the artist must prepare for these possible variations in the valuation of the gross estate when attempting to gauge what will be the amount of the estate taxes.
Taxable Estate
The gross estate is reduced by a number of important deductions to reach the taxable estate. The deductions include funeral expenses, certain administrative expenses, casualty or theft losses during administration, debts and enforceable claims against the estate, mortgages and liens, the value of property passing to a surviving spouse subject to certain limitations, and the value of property qualifying for a charitable deduction because of the nature of the institution to which the property is given.
Proper estate planning offers the opportunity to be as certain as possible that expenses, particularly selling commissions for artworks, will be deductible as administration expenses.
The marital deduction offers an important tax advantage. The deduction equals the value of property left to the surviving spouse (provided that the value of the property has also been included in the gross estate). A spouse, especially a wife, is entitled in any case to a share of the deceased spouse’s estate by law in most states. In New York, for example, a surviving spouse has a right to one-half of the deceased spouse’s estate, but the right is reduced to one-third if there are also surviving children. The value of property used for the marital deduction must basically pass in such a way that it will eventually be taxable in the estate of the surviving spouse. The marital deduction thus postpones estate taxes but does not completely avoid them.
The charitable deduction is of particular interest to the artist, since this provides the opportunity to give artworks to institutions such as museums or schools that the artist may wish to benefit. The fair market value of such donated works is deducted from the artist’s gross estate. A will clause is used stating that if the institution is not of the type to which a bequest qualifying for a charitable deduction can be made, the bequest will be made to a suitable institution at the choice of the executor.
The tax effect of willing a work to a charity is identical to the artist’s destroying the work prior to death. If the work is willed to charity, fair market value is included in the gross estate, but the same fair market value is then subtracted as a charitable deduction in determining the taxable estate. But even if the estate tax rate were as high as 55 percent, keeping the work would still pass 45 percent of the value to the recipients under the will.
However, if the estate does not have cash available to pay the estate taxes, charitable bequests may be an excellent way to reduce the amount of the estate taxes. Also, the intangible benefits, including perpetuating the artist’s reputation, may well outweigh considerations of the precise saving or loss resulting from such bequests. Once the gross estate has been reduced by the deductions discussed above, what is left is the taxable estate.
Unified Estate and Gift Tax
As this book goes to press, there is confusion about estate taxation. After a number of years in which estates had to be larger and larger to be taxed, in 2010 the estate tax ended entirely—but only for 2010. If nothing is done, in 2011 the size of a taxable estate will go back to what it was before the law was changed in 2001. It appears that neither the Democrats nor the Republicans want this to happen, but the parties disagree as to what should be done. The Democrats would accept the exclusion from taxation of $3.5 million with a top rate of 45 percent, while the Republications might prefer the exclusion to be closer to $5 million with a top rate limited to 35 percent.
It’s quite likely that if a new law is enacted in 2010, it will be retroactive to January 1, 2010. This retroactivity may very well be challenged in the courts, leaving the status of many estates in limbo for years. In any event, it’s likely that a progressive tax will apply to the artist’s cumulated total of taxable gifts and the taxable estate. The progressive rates will rise, perhaps from 18 percent if the cumulated total of taxable gifts and taxable estate is small, to 35 or 45 percent if the cumulated total is over $3,500,000 or perhaps $5,000,000. It should be noted that the federal estate tax is reduced by either a state death tax credit or the actual state death tax, whichever is lesser.
The discussion that follows assumes that an estate tax will exist in the future.
Liquidity
The tax court in Estate of David Smith found a fair market value of $2,700,000 for the 425 artworks. As of the date of death, cash available to the estate other than from sales of sculptures amounted to only $210,647. The discrepancy between estate taxes owed, which normally must be paid within nine months of death at the time the estate return is filed, and available cash can plague estates composed largely of artworks.
One of the best ways to have cash available to pay estate taxes is to maintain insurance policies on the life of the artist. The proceeds of life insurance payable to the estate are included in the gross estate. So are the proceeds of policies payable, for example, to a spouse or children if the insured artist keeps any ownership or control over the policies. But policies payable to a spouse or children and not owned or controlled by the artist will not be included in the artist’s gross estate. If a spouse or children are the beneficiaries under both insurance policies and the will, they will naturally want to provide funds to the estate to pay estate taxes so that the artworks do not have to be sold immediately at lower prices. The funds can be lent to the estate or used to purchase artwork from the estate at reasonable prices. Such policies should probably be whole or universal life insurance, rather than the less expensive term insurance that may be nonrenewable after a certain age or under certain health conditions. Also, such life insurance may sometimes best be maintained in a life insurance trust, especially if a trustee may have a greater ability than the beneficiaries to manage the proceeds. This stage of estate planning requires consultation with the artist’s attorney and insurance agent to determine the most advisable course with regard to maintaining such life insurance.
Another method for easing estate liquidity problems may be available to an artist’s estate. Upon a showing of reasonable cause, the district director may extend the time for payment up to ten years. The interest on such unpaid taxes is adjusted to reflect the current prime interest rate.
Tax deferral may also be achieved under a different provision of the tax law. If more than 35 percent of the adjusted gross estate consists of an interest in a closely held business (such as being the sole proprietor engaged in the business of making and selling art), the tax can be paid in ten equal yearly installments. And, if the executor so elects, the first installment need not be paid for five years. Interest payable on the estate tax attributable to the value of the business property is eligible for special low rates of interest subject to certain limitations.
Gifts
After seeing the tax computations, the artist may decide that it would be advisable to own fewer artworks at death. If the artist makes gifts of artworks while alive, the value of the gross estate at death could be reduced. The incentive for making gifts is a yearly exclusion of $13,000 applicable to each gift recipient. If an unmarried artist in one year gave paintings with a fair market value of $14,000 each to each of three children and two friends, there would be total gifts of $70,000. This gift to each person, however, would be subject to the $13,000 exclusion applied each year to each person to whom a gift is given-one person or a hundred. Thus, the $14,000 gifts to each person would be taxable only to the extent of $1,000. The total taxable amount would, therefore, be $5,000. The artist who can afford gifts should usually take advantage of the yearly exclusions.
If the artist were married rather than single, the artist and spouse could elect to treat all gifts as being made one-half from each. This has the effect of increasing to $26,000 the yearly exclusion for each gift recipient. Also, an artist may generally make unlimited gifts to a spouse without payment of any gift tax.
Gifts must be complete and irrevocable transfers, including transfers in trust, for the benefit of another person or group. Especially if the gift of an artwork is to a family member, every effort should be taken to show a gift has truly been given. This can be done by delivery of the work and execution of a deed of gift. After the gift, the artist must completely cease to exercise control over the work. If, for example, the work is exhibited, the name of the owner should be that of the family member who has received the work, not of the artist. If the artist retains rights, there will not be a valid gift for tax purposes and the value of the work given will be included in the artist’s gross estate. Also, the artist should not serve as custodian of gifts given to minor children, since such custodianship will again cause the value of the gift property to be included in the artist’s gross estate.
Gift tax returns must be filed on an annual basis. The failure to file a gift tax return can result in assessments of interest, penalties, and, in some cases, even criminal charges.
A factor that might make the artist wary of giving too many artworks as gifts is the elusiveness of financial security and the possibility that an artist’s earlier work may be more valuable than later work. Work from the critical period that forged the artist’s sensibility and perhaps contributed to the definition of an art movement may prove far more valuable than work done when other new movements have become predominant or the artist has developed a different style. Giorgio de Chirico was acclaimed as a leader in the development of surrealistic art, but his later work never met with as favorable a reception. While early work he no longer owned sold for higher and higher prices, his later style was so unrewarding that he occasionally resorted to imitating his earlier work and misdating the results to his earlier period, creating what were truly self-forgeries.
The artist can also make gifts to charities without having to pay a gift tax. Such gifts may give the artist the opportunity to see if the charities will put the artworks to suitable uses. But charitable gifts have no advantage over charitable bequests under the will in terms of saving estate taxes. After the gift of a work, the artist of course would not own the work at death and its value could not be included in the gross estate. While the value of the same work would be part of the gross estate if owned at death, a charitable bequest would reduce the gross estate by the value of the work. The taxable estate would be the same in either case. After 1981, both a work of art and its copyright will be considered separate properties for estate and gift tax charitable deductions. So a charitable deduction would be allowed for a work of art given or bequeathed to a charity even if the copyright were not also transferred to the charity.
Deed of Gift
I,____________________, residing at ______________________ being the absolute owner of an artwork titled __________________ created by ____________________________ and described as___________________ do hereby give, assign, and transfer to __________________________ residing at ________________________ all of my right, title, and interest in and to said artwork, absolutely and forever. It is my intention that this transfer of the above described artwork shall constitute a gift of the same by me to _______________________.
IN WITNESS WHEREOF, I have hereunto set my hand and seal with this______________________ day of __________________, 20____.
_________________________________ Donor __________________________________
Notary public
Basis
The recipient of an artwork as a gift holds the work as ordinary income property and takes the basis of the artist who gave the gift. But a beneficiary who receives an artwork under a will holds the work as a capital asset with a stepped-up basis of the work’s fair market value as included in the gross estate. For example, an artist in 2012 created an artwork with a zero basis. If the artwork were given to a daughter, the daughter would have a zero basis and receive ordinary income when she sold the work. If the sale price were $5,000, she would receive $5,000 of ordinary income. On the other hand, if the artist died in 2015 and the work was valued in the estate at $5,000, the daughter who received the work under the will would have a basis of $5,000. So if she sold the work for $5,000, she would not have to pay any tax at all. If she sold the work for $7,500, the tax would be on only $2,500 and at the favorable capital gains rates. This difference in treatment may be an important factor in determining whether to make gifts or bequests. (It should be noted that if the estate tax is not continued for 2010 and years thereafter, which seems unlikely, there would no longer be stepped-up basis and substantial additional income taxes would be collected as assets are sold.)
The Estate Plan
The planning of an artist’s estate is a complex task, often requiring the expertise of accountants, insurance agents, and bank officers, as well as that of a lawyer. But an informed artist can be a valuable initiator and contributor in creating a plan that meets both the artistic and financial estate planning needs of the artist.