7
Unintended Consequences—Cultural Property, Endangered Species, and Taxes
Well-intentioned rules and tax laws can lead to unintended consequences. The art world is no different, though it has some surprising twists and turns for collectors.
ANDY WARHOL AS CULTURAL PROPERTY
Many countries limit trade in works of art that fall into country-specific definitions of cultural property.1 But these restrictions no longer only apply to antiquities, Old Masters, and other “old art.” They increasingly impact art made in the twentieth century. Because these rules are a restraint on trade, they can lower the value of art that must remain in the country and create potential title issues for collectors when sold abroad. While the United States has few restrictions on the import and export of art, rules in other countries can have surprising consequences for US residents.
Germany—Pushing Art Out the Door
Andy Warhol famously said, “Making money is art and working is art and good business is the best art.” He probably loved that two of his early paintings were hanging in a casino in the German town of Aachen. On their way to slot machines and poker tables, gamblers walked past Triple Elvis, a 1963 silk-screen painting of three life-size images of Elvis on a silver background, or Four Marlons, a 1966 silk-screen painting of four life-sized images of Marlon Brando on a motorcycle. Purchased in the late 1970s for $185,000, or what today would be close to $750,000, the paintings were part of a plan to glamorize an otherwise off-the-beaten track gambling parlor.2 With the passage of time, the casino conglomerate that owned the Aachen operation fell on hard times. In 2014, the German state-owned bank that then controlled the company decided to sell the paintings. As assets of a troubled company, the sale was a reasonable action by the owners to raise funds. But protesters emerged claiming that this was a dangerous sale of cultural property owned by a state-run financial institution. The sale went ahead anyway, with the works selling for a staggering $151.1 million.
The sale, however, led the German culture minister to advocate for tough new rules to limit the export and sale of artwork.3 In July 2016, the German parliament passed legislation at the minister’s behest. Owners of works of art worth more than 150,000 Euros that are at least fifty years old now need an export license for the work to be shipped out of the European Union.4 Officials in each of Germany’s sixteen regions also now have the authority to declare a work in their region to be of national significance. They can then bar it from leaving and restrict sale to individuals or institutions in Germany. The rules apply to art by both deceased and living artists, and artists of all nationalities.5 The culture minister indicated that if the rules were in place in 2014, she would have blocked the export of the two Warhol paintings.
Bureaucrats love rules but often overlook or ignore unintended consequences as they try to control markets. While the legislation is new, German-based collectors already are taking action to get art out of Germany. “The majority have already shipped their most valuable works outside of the country. Artworks now have an expiration date. This law serves as an added impetus for collectors to sell works once they near the date where export might prove difficult,” said Daniel Hug, director of Art Cologne, in a recent interview with Artsy.6 While German collectors are made worse off by these rules, who benefits? Collectors in the United States are likely to have smiles on their faces as art flows out of Germany and becomes available for sale.
In the land that many people believe invented bureaucracy, the fine art export rules do not disappoint. Artwork that is at least fifty years old and created by a now-deceased artist needs an export license to leave the country. As of 2017, this impacts art made before 1967. It applies to all deceased artists, not just artists of Italian heritage. So a collector in Milan with an Andy Warhol from 1965 needs an export license for it to leave the country. Aside from vacationing in Italy, Warhol is not typically associated with “Italian art”; his parents immigrated to the United States from Slovakia. He was born and raised in Pittsburgh.
The law forces Italian collectors to be on “death watch,” because the export status of works in their collection can change overnight when an artist passes away. The rules also apply to art independent of its value, unlike in Germany. So every Warhol created before 1967 that is in Italy, be it a $5,000 print or a $5 million painting, needs an export license to leave the country. Securing a license is time consuming, plus it creates incentives for side deals and other forms of bad bureaucratic behavior. The Ministry of Culture is also permitted to declare an artwork of national importance. It can then block an artwork from leaving the country and limit its sale to only Italian residents or institutions. The laws also apply to expatriates living in Italy.7
Elena Quarestani, an Italian collector with a Salvador Dali painting, is dealing with the consequences of these rules. As reported by the Guardian, “… local officials in Milan have claimed that the portrait [by Dali] should be protected as a piece of Italian cultural heritage. That assessment has given the government the right to block an attempt by Christie’s, the auction house, to sell the painting for Quarestani. It also blocked an offer by the Dali Foundation [based in Spain] to acquire the work….”8 What makes this ruling so arbitrary is that this is an early work by Dali that does not incorporate any motifs for which he is known. But for being by Dali, the painting would likely be worthless based on artistic merit alone. Works like this typically appeal only to connoisseur collectors of the artist or to an institution devoted to him, neither of which is likely to be found in Italy. Restricting the sale to Italian buyers is tantamount to forcing the owner to sell the work at a discount. But owners have no recourse to the government to be compensated for their loss.
As in Germany, US collectors benefit when Italian collectors move art out of the country. Consider Arte Povera, an important art movement that originated in Italy in the late 1950s and early 1960s. Many Italian collectors with works by these artists moved them out of the country before the fifty-year rule would apply. The availability of works on the international market made it easier for galleries to host shows devoted to Arte Povera, many of which occurred over the past five years in New York and London. The Italian rules created unintended buying opportunities for US collectors.
Collectors also need to be alert to potential title issues associated with the Italian laws. Because art is portable, some Italian owners may elect to spirit works out of the country without getting the needed approvals. Buyers in the United States could then inadvertently purchase a work that may be subject in the future to a claim by the Italian government. As a result, it is important for collectors acquiring work by Arte Povera artists made before 1967 to vet the provenance of the work to make sure needed export licenses were obtained. The same is true, unfortunately, for a buyer of an early Warhol that was in an Italian collection.
Mexico—the Markets for Work by Diego Rivera and Frida Kahlo
Like much of Europe, Mexico has comprehensive laws governing trade in fine art. But for certain artists, like Diego Rivera and Frida Kahlo, the government bans outright the export of their work.9
Under Mexican law, the government can declare an artist a national treasure. Work by the artist is then subject to the rules and regulations of either the National Institute of Anthropology and History (INAH) or the National Institute of Fine Art (INBA). In addition to care, maintenance, and restoration rules, both institutes require all work in the country by these artists to remain in Mexico. Sales are permitted to collectors or institutions within the country, but sales outside Mexico are forbidden. Violators are subject to criminal prosecution.
Diego Rivera went on the list when he died in 1957. Born in Mexico in 1886, Rivera had a long and prolific career. He moved to France in 1907 when he was twenty-one and stayed for fourteen years. He returned to Mexico in 1921 and remained there but for travel abroad for major fresco commissions in San Francisco, Detroit, and New York and numerous gallery and museum shows.
Frida Kahlo, a young art student, met Diego when he was already an international art star. They married in 1929 when he was forty-two and she was twenty-two. They had a fractious and combustible relationship. Kahlo died in 1954 when she was forty-seven. During their lifetimes, Diego was the rock star while she was on the margins artistically. Her posthumous career took off in the 1980s when retrospectives of her work occurred outside Mexico and books and movies about her personal narrative increased her visibility. Because she traveled constantly with Diego and suffered from physical limitations due to a bus accident, Kahlo did not create much work. Carmen Melián, a leading advisor on Latin American art who previously ran the Latin American Department at Sotheby’s, estimates that Kahlo completed around 150 paintings and about as many drawings. As Kahlo’s popularity rose, so did calls within Mexico for the government to declare her a national treasure. Kahlo went on the list of protected artists in 1981.
Paintings by Rivera and Kahlo that must remain in Mexico sell for less when compared to prices achieved internationally for works of comparable quality. Melián estimates that a Rivera work restricted to the Mexican market would likely trade at a 20 to 30 percent discount. For Kahlo, the discount is likely closer to 40 percent. The larger Kahlo discount is due to her work being much more popular outside of Mexico. Collectors who covet her work bid up the price relative to what Mexican-domiciled collectors and institutions are willing to pay.
BUTTERFLY WINGS AND ANIMAL SKINS
While artists have used oil paint, marble, and bronze for centuries, nontraditional items like butterfly wings, animal skins, and stuffed animals have crept into the artist tool kit over the past one hundred years. For example, an iconic work by Meret Oppenheim from 1936 consists of a teacup, saucer, and spoon covered with the speckled tan fur of a Chinese gazelle. Titled Object, it is a very popular item in the collection of the Museum of Modern Art. More recently, Damien Hirst makes large paintings covered with dead butterflies, while Anselm Kiefer uses animal skins in some of his paintings and sculptures.
But collectors owning work with unconventional materials can suddenly find themselves ensnared in complicated rules and regulations regarding the transport and sale of endangered and threatened species. First, a bit of history. In 1973, eighty countries signed an international agreement called CITES (the Convention on International Trade in Endangered Species of Wild Fauna and Flora) to limit trade in animals and plants whose survival was threatened. CITES was a framework governments used to create national laws. In the United States, CITES was incorporated into the Endangered Species Act signed into law by Richard Nixon on December 28, 1973.
The Endangered Species Act, however, is just one of many federal and state rules that restrict trade in endangered species. The Migratory Bird Treaty Act makes it illegal for anyone to take, possess, import, export, transport, sell, purchase, barter, or offer for sale any migratory bird, or the parts, nests, or eggs of such a bird without a valid federal permit.10 The Bald and Golden Eagle Protection Act prohibits anyone from acquiring or trading bald eagles, including their parts, nests, or eggs. There are also state-based rules covering different types of fauna and flora, such as regulations created by the California Endangered Species Act (CESA).11
US collectors need to be in compliance with all of these rules and regulations. A famous example of a collector getting tripped up by them was Ileana Sonnabend, the gallerist and collector mentioned in Chapter 2. She owned an iconic Robert Rauschenberg work from 1959 that incorporates a stuffed bald eagle.12 But the Bald and Golden Eagle Protection Act makes it illegal to possess bald eagles, whether dead or alive. The issue came to prominence after Sonnabend passed away in 2007 and her collection was valued for estate tax purposes. Because of the regulations, the estate deemed the Rauschenberg worthless. The IRS, however, valued it at $65 million and demanded $29 million in estate taxes. The estate challenged the judgment in tax court. The parties settled with the IRS dropping its demand for estate taxes in exchange for the estate donating the work to a museum but with the value of the gift being zero.
Compliance issues do not stop at US borders. Because CITES is a framework, country-specific implementation can result in stricter or looser rules than those in the United States. This complicates things for collectors, because movement of artworks between countries must comply with rules from both the sending and receiving countries. For example, a US-based collector may buy a painting in London that incorporates butterflies in compliance with UK rules. But the United States may have a different list of protected butterflies. So if the work has one butterfly on the US-specific prohibition list, then the collector will not be able to bring it home.
When collectors are considering artwork that incorporates unconventional materials, they need to ask a lot of questions to understand whether any of the materials are subject to use prohibitions. The seller may provide them with written documentation, but the buyer should double- and triple-check them, because the seller’s facts may be out of date (e.g., flora and fauna are regularly added to endangered and threated lists) or the seller may not fully reveal all information in a rush to get it sold. Because materials are part of the condition of the work, buyers generally have no recourse to get their money back if they later discover the work contained restricted materials.
Auction houses try to be especially transparent about the risks bidders take on when they buy something with restricted materials. For example, Phillips includes the following statement in its auction catalogues:
Before bidding for any property, prospective buyers are advised to make their own inquiries as to whether a license is required to export a lot from the United States or to import it into another country. Prospective buyers are advised that some countries prohibit the import of property made of or incorporating plant or animal material, such as coral, crocodile, ivory, whalebone, Brazilian rosewood, rhinoceros horn or tortoiseshell, irrespective of age, percentage or value. Accordingly, prior to bidding, prospective buyers considering export of purchase lots should familiarize themselves with relevant export and import regulations of the countries concerned. It is solely the buyer’s responsibility to comply with these laws and to obtain any necessary export, import and endangered species licenses or permits. Failure to obtain a license or permit or delay in so doing will not justify the cancellation of the sale or any delay in making full payment for the lot. As a courtesy to clients, Phillips has marked in the catalogue lots containing potentially regulated plant or animal material, but we do not accept liability for errors or for failing to mark lots containing protected or regulated species.13
GENEROSITY, TAXES, AND LEGACY PLANNING
Taxes impact the behavior of collectors and artists in some surprising ways. In the balance of this section, I share how the tax system in the United States rewards art investors but penalizes collectors, discourages living artists from donating their work to museums, spurs wealthy collectors to open private art museums as a tax-efficient way to collect art, and leads many families to avoid legacy planning around their art collection.
As you read this section, remember that the examples are offered for educational and informational purposes only. The examples reflect the tax code as of 2016.14
Art Investor or Collector?
Suppose many years ago a collector fell in love with a painting, bought it for $10,000, and hung it in his living room. Since then, the artist’s career has taken off, and the painting is now worth $400,000. Lucky collector. But he now wants to sell it and use the proceeds to buy different artwork that is more consistent with his current tastes.
From the perspective of the government, selling the painting is a taxable event. Since the painting was held for more than one year, the collector needs to pay long-term capital gains tax on the $390,000 increase in value. At the federal level, the collector may be required to pay a combined 31.8 percent tax on the gain, leaving him with $276,000 after taxes to buy art.15 The story ends there for collectors. But suppose the facts and circumstances change so the owner of the painting held it for investment purposes. Then it may be possible to defer paying capital gains taxes on the sale and have $400,000 to spend on art. Interesting news. How does it work?
The key is Section 1031 of the Internal Revenue Code. When investors sell property that has increased in value, for example an apartment building, they pay capital gains taxes in the year of the sale. But Section 1031 permits investors to defer paying the tax if they reinvest the proceeds in similar, like-kind property (i.e., another apartment building). Section 1031 Exchanges, also called Like-Kind Exchanges, have been part of the tax code for years and are frequently used by real estate investors. Investors in art can potentially use the 1031 exemption to defer paying capital gains taxes on a sale as long as they reinvest the proceeds in like-kind art. The Internal Revenue Service has not provided specific guidance on what “like kind” means for artworks. Tax advisors, as a result, tend to advise clients to exchange paintings for paintings, sculpture for sculpture, and drawings for drawings.
What defines an art investor? This is the critical question, because only investors can take advantage of 1031 Exchanges. There is no single fact or behavior that categorically determines whether someone is an investor. If the owner never sold anything meaningful from her collection and she displayed the artwork prominently in her home, then the IRS will most likely view her as a collector, not an investor. Investors own art principally to earn a profit, rather than for personal enjoyment. Tax advisors believe the IRS will view taxpayers more favorably as investors if they have regular collection appraisals done by professionals; take steps to increase the value of the collection by, for example, lending works to museums; keep detailed records of purchases and sales; seek advice from art experts on purchases and sales; and present themselves to galleries and auction houses as art investors.
Given the tax benefits associated with being an investor, many art world participants use like-kind exchanges when they make changes in their art collection. It has been a very important factor over the past ten years fueling art market turnover. The rules and regulations around like-kind exchanges are complex and need to be followed assiduously. As a result, a qualified tax advisor should be involved to help handle all the issues associated with using this important tax-planning tool.
Why Living Artists May Be Less Generous
Americans are extraordinarily philanthropic. The Charities Aid Foundation recently ranked the United States first among twenty-four countries based on the value of charitable giving when expressed as a percent of GDP.16
Some of this generosity is due to the US tax code rewarding charitable giving. When making a donation, donors can generally deduct the value of that contribution when calculating their income taxes. While the value of the deduction will depend heavily on the donor’s specific circumstances, for those with high income, it is often times approximately equal to their marginal tax rate times the value of the donation. What does this mean? At the federal level, the highest tax rate on ordinary income is currently 39.6 percent.17 So if someone donates a $500,000 painting to a museum, the value of that donation may reduce his federal income tax bill by up to $198,000 in the year of the donation. In economic terms, it means the contribution of the $500,000 painting did not really cost the taxpayer $500,000, but instead $302,000 after accounting for his tax savings.
While collectors enjoy this important tax benefit when donating art, the same is not true for artists. If artists donate something, they can only deduct the cost of the materials they used to create the work. So if a collector, for example, donates a Jasper Johns drawing worth $500,000, he can deduct the $500,000 gift and potentially reduce his federal income tax bill as discussed above. But if Jasper Johns the artist donates a $500,000 drawing, he can only deduct maybe $20, the cost of the paper and pencils he used to create it. His tax savings, as a result, are essentially zero. So by donating it, he is out $500,000 in value, while it costs the collector $302,000 to make the same type of donation. Not surprisingly, many artists do not make lifetime donations of their work to museums.
When an artist passes away, however, the rules change. The tax code now values the artist’s work at fair market value, and it is subject to estate taxes. The executor will need to work with an appraiser to value all the art in the estate. This can be challenging, because each artwork is unique and varies in quality. Moreover, the appraiser needs to factor into the assessment the potential negative impact of a large number of works coming to market and the impact of the artist no longer being available to market works to buyers.
For commercially successful artists, their federal estate tax liabilities can be quite substantial. If the value of all of their assets, less debt, is greater than $5.45 million (the 2016 federal estate tax exemption), then the estate will have to pay 40 percent of the amount above the exemption amount in estate taxes.18 Depending on where the artist lived, the estate could also be liable for additional state-based estate taxes. As the value of art has increased, more artists are realizing they need a legacy plan. An artist foundation can be an important tool to help reduce estate taxes, because the estate can deduct the fair market value of work donated to the foundation, rather than just the cost of materials used by the artist. It can also provide a platform to continue promoting the artist’s work.19
Because so much of the value of an artist’s estate is likely to be made up of illiquid art assets, the IRS recognizes the estate will need time to raise funds. The IRS is generally willing to put the estate on an installment plan that can last for ten years or more. But for collectors, estate taxes have to be paid within nine months. In death, artists finally get a better deal than collectors.
Private Art Museums as a Tax-Efficient Way to Collect
Art museums in the United States live on the generosity of individuals. Most of the support art museums rely on for their annual operating budgets comes from individuals or foundations and trusts set up by them.20 The Association of Art Museum Directors also estimates that more than 90 percent of the art objects in public art museums were donated by private individuals.21
Collectors enjoy important tax benefits when they donate art to public art museums, as described in the previous section. But in addition to public art museums, extremely wealthy collectors have another choice: create their own private operating foundation. For example, suppose a wealthy collector has a very large collection of prints by Andy Warhol, Frank Stella, James Rosenquist, and other artists. The collector is passionate about enabling art museums in underserved communities around the United States to use his collection for shows he will fully underwrite. Because this is a passion project that would be hard to implement and control through a public museum, the collector may instead elect to create a private operating foundation. Donations of artwork and cash to a private operating foundation enjoy the same tax benefits as donations to a public art museum. Furthermore, all the costs incurred to insure the collection, store it when is it not on tour, framing and conservation, plus staff costs associated with curating shows and running the foundation are tax deductible.22
More and more very wealthy collectors who want to realize a vision and create and shape a legacy are considering private operating foundations. It is also a very tax-efficient way to collect, because they can deduct for income tax purposes the fair market value of the collection they donate and ongoing operating costs. In addition, they can deduct new acquisitions they contribute to the foundation. Tom Hill is a recent example of a collector creating a private operating foundation. Hill and his wife will open a two-story public exhibition space in New York in the fall of 2017.23 The foundation will host shows of their collection of twentieth-century and contemporary art, including fourteen works by Christopher Wool, the artist profiled in the beginning of Chapter 4. They also have a collection of Renaissance and Baroque bronzes that will be on display. They plan to partner with the Frick Museum, the Studio Museum in Harlem, and the Metropolitan Museum of Art to run arts education programs for New York City school kids in their new exhibition space.
Private art museums have been an important part of the American cultural landscape for years. The list of museums that either started out as a private foundation or remain that way today include the Whitney Museum of American Art, the Guggenheim Museum, the Frick Collection, the Amon Carter Museum of American Art, the Phillips Collection, the Barnes Foundation, the Ronald Lauder Neue Galerie, the Isabella Stewart Gardner Museum, and the Crystal Bridges Museum of American Art.
Like anything involving money and taxes, there can be abuses. The tax status and behaviors of private operating foundations regularly attract IRS and congressional scrutiny. The Senate Finance Committee, for example, announced at the end of 2015 a review of whether private art museums provide enough public benefits to justify their tax-exempt status.24 Robert Storr, the retiring dean of the Yale School of Art, expresses the concern of many: “I’m not against it [private art museums], but it’s got to be done well. If there’s to be a public forgiveness for taxes there should be a clear public benefit, and it should not be entirely at the discretion of the person running the museum or foundation.”25
What does this ongoing scrutiny mean for collectors thinking about setting up a private operating foundation? Tax and legal experts typically advise:
• Access and outreach. Provide frequent and regular access to the collection. Promote the museum and how the public can access it. Advertise. Run education programs and other events that draw in the public. Keep attendance records so there is a clear record of public use and engagement.
• Location and signage. The collection should be displayed in a separate facility with clear and distinct signage that the museum is open to the public.
• Use of property. Once an artwork is donated, it is no longer an asset available for personal use. Do not temporarily loan a work back or create a rental program where the donor pays the foundation a fee to use a work of art. Do not use the museum for personal events.
IRS scrutiny of private museums will likely increase due to the recent Senate Finance Committee investigation. When the Committee turned over its findings to the IRS in June 2016, Orrin Hatch, the committee chair, said:
As Congress lays the groundwork for a comprehensive overhaul of the tax code, we must learn as much as we can about how the tax code works in practice, including how certain entities are using tax-exempt rules to found and run art museums. Under the law, these non-profits must provide a significant public benefit to merit tax-exempt status. And while most museums work every day to meet this standard, it is clear there are a number that should do more.26
Legacy Planning
Planning how to distribute a collection passionately assembled over a lifetime can bring up difficult questions about mortality, family dynamics, and taxation. No wonder so many collectors keep the topic “stuffed in a drawer.” Even those who embark on a journey to figure out what to do can run into surprising roadblocks.
Understanding and Managing Resentment
Tom and Hillary spent a lifetime collecting. They love the thrill of the hunt and being part of the art-world community. They continue to be active collectors but at a much diminished pace from their peak collecting years. They have three adult children, all with their own independent lives. Their children enjoy the collection, but it is more about the value of it than a love or deep appreciation for the artworks themselves. None of the children have homes or lifestyles that are consistent with owning valuable art. Moreover, they all harbor different levels of resentment toward their parents for all the time and money they spent collecting. The children keep their views about their parents’ “pride and joy” tucked away, but every indication is that they will sell the collection immediately once their parents pass. Two museums where Tom and Hillary are active have their eyes on some of the works in the collection. A ground war already broke out between the museum directors who are each trying to position their institution for important bequests. Tom and Hillary’s children caught wind of this, which only increased their sense of resentment and concern about how the collection will be treated when their parents pass away.
Generosity That Backfires
Beth and John are active collectors. They have two sons, both of whom like art and have since become collectors in their own right. A number of years ago, when the sons were adults, Beth and John elected to gift a painting to each of them. Because the sons are intensely competitive with each other, the parents knew it was important to do this in a transparent way so that neither son would feel the other got a better deal. Beth and John gave their sons copies of their collection appraisal document. They were told they could select something, but it had to be worth no more than $250,000. Not surprisingly, both of them picked objects worth close to the $250,000 value limit; luckily it was not the same object. The sons were very grateful. An implicit, but not explicit, part of the parents’ gift was that the sons would not sell the works. Ten years later, one painting was struggling to maintain its original value while the other was worth multiples of that amount. The son with the more valuable painting decided to sell it. The son with the less valuable painting cried foul and demanded his brother share sale proceeds with him, which he refused to do. The aggrieved son then approached his mother, who was the only surviving parent at the time and asked her to adjust her will to compensate him for his brother’s actions. No good deed goes unpunished.
Who to Trust When It Comes Time to Sell a Collection
Seymour, a self-made businessman, has assembled a valuable collection in multiple categories with his wife. They are very philanthropic and have arranged their estate so that the entire collection will be sold after they have both passed away to fund charitable causes that are important to them. Until that time, they intend to live with the collection. Their children, who are not collectors, applaud their parents’ plan to donate much of their wealth to charity. Seymour is confident that his trust and estate lawyers did a great job planning the estate, but he is concerned about how that team will execute the plan to sell the collection. Given the size and scope of it, selling the collection will be a long and complicated task. Because every dollar raised from the sale will go to charity, Seymour wants to make sure someone schooled in the art world will act on their behalf as a fiduciary to maximize sales proceeds and minimize sale costs. He is deeply concerned about who to trust for this important future assignment.
These stories illustrate the need for collectors to have a legacy plan for their art collection that they understand and believe in. Here are some closing thoughts on how to create one.
The first step is a candid assessment of the family’s goals and attitudes toward the art collection. The type of questions to be answered include: How important is it to keep the collection intact during the collector’s lifetime? After the collector passes? What promises, either implicit or explicit, have been made to family members, museums, or other institutions? Are potential heirs ready and able to take responsibility for the collection, or are they primarily interested in what it is worth and how it will be distributed to them?
Next is to understand collection value and risk. Collectors need to get fair market value (FMV) estimates for each item in their collection.27 Professionals should be brought in to provide this information. It is also important to identify where there is valuation risk in the collection. For example, which artists in the collection have peaked in value versus artists who may see meaningful appreciation over the next five years? Having a perspective on risk is important, because it can influence which works to sell, gift, or donate.28
Armed with this information, collectors need to step back and think about a collection dispersal plan independent of taxation. Taxation will no doubt influence the ultimate plan, but collectors can get wrapped up on tax issues too early in the process. It is generally better for them to first think through what they would ideally like to accomplish with the collection. Their tax, legal, and financial advisors can then help them weigh alternative methods to achieve it.
Legacy planning can bring up uncomfortable issues that some collectors and their families may prefer to avoid. But deferring decisions about the fate of a collection can lead to disagreements and bad feelings among the heirs as well as higher estate taxes than would be the case with advance planning. The worst outcome is when the wishes of the collectors are not implemented after they pass because the heirs did not understand what they wanted done or the sale was entrusted to unqualified or unscrupulous sales agents. Although there is no way to make legacy planning simple, it is important to remember that only three things can be done with the collection during either the collector’s lifetime or posthumously: sell it, donate it, or gift it. You can’t take it with you.