Art is a unique asset. A piece of artwork may have incredible personal significance to the collector and the collector’s family. It may also be a lucrative investment and a significant estate asset. In the event of a collector’s death, artwork cannot be easily divided and distributed to beneficiaries. The market value of a piece of artwork can be difficult to determine and, depending on the piece, can fluctuate wildly based on tastes and trends.
For individuals who collect art – whether established collectors with large collections, amateurs or families with a few cherished pieces, or anywhere in between – it is important to carefully consider the distribution of artwork upon the collector’s death.
There are many planning possibilities for artwork, and each situation can be as unique as the art itself. Here are five estate planning recommendations for the art collector to consider:
- Know What You Own. Is the art collection investment grade? If the answer to this question is unknown, consider getting the artwork appraised during the collector’s lifetime. Does the collector have legal title to both the physical artwork and the copyrights attributed to the underlying work? What is the collector’s ultimate plan; which pieces do they wish for family to inherit, which pieces should be sold (assuming that the artwork is not subject to re-sale restrictions) and which should pass to an art museum or foundation? What has been the collecting objective – was it for investment, aesthetic or philanthropic purposes? How does the collector interact with the art collection; do they live with the artwork in their home(s) or is it housed in a warehouse?
- Keep Good Records. Whatever the ultimate plan for the collection, the following documentation should be organized and maintained to allow for the seamless transition of the art to the beneficiaries:
a. Inventory: The collector should keep a running inventory for each piece of art in the collection. The inventory should list as much identifying information as possible (e.g., the name of each work, the artist, the date created, medium, dimensions, where it is stored, when and from where and/or from whom it was purchased, along with a photograph of the artwork for identification purposes.)
b. Receipts and Invoices: Keep a record of the purchase of the artwork as well as any sales of prior owned artworks in the collection. Keep any shipping invoices, storage contacts and storage invoices as well as any invoices for security and maintenance of the artwork.
c. Condition Reports: For artwork sold through the secondary art market of auction houses, a condition report (a physical examination of the artwork) is routinely prepared. As the name implies, this report evaluates the “condition” of the artwork and should be maintained in the collector’s records.
d. Provenance, Title, Exhibition History, Insurance Policies: The collector should keep any provenance and title documentation, as well as any listings of where the artwork was previously exhibited, any Certificates of Authenticity provided by the gallery or the artist as well as copies of all agreements for sale, loan, exhibition, records of any copyright registrations, and copies of any insurance policies.
e. Appraisals: Keep a copy of all appraisals, including but not limited to appraisals acquired to determine the retail replacement value for insurance purposes and appraisals to determine the fair market value of the artwork for estate planning purposes. - Choose the Right Stewards. The selection of fiduciaries, whether it be an Executor under the Will or a Trustee under a Trust Agreement, is an important decision in every estate plan. [Please see our advisory entitled “Executor and Trustee Selection here.] The collector may want to consider the appointment of a trusted and neutral party or an art advisor as a co-Executor with the primary responsibility for handling the art pursuant to the Will, which may involve selling the art, facilitating the donation of the art to museums, and generally overseeing the stewardship responsibilities above until the art (or the proceeds from selling the art) is ultimately disseminated pursuant to the Will. The same considerations herein apply for the selection of appropriate Trustees of any continuing Trusts after the decedent’s death. For example, does the client want the art to pass directly to his or her children, or managed in trust for their lifetime benefit by a Trustee with art market knowledge?
- Have a Process and Specify Who Gets What. Because art is a unique asset, and because it is not easily divided, its distribution at the collector’s death should specifically be addressed in the estate plan to avoid disagreement and discord; it should be separated from the distribution of other items of tangible personal property (such as furniture, cars and family heirlooms.) The collector should outline with as much specificity as possible, either within the estate planning documents (for binding effect) or in a non-binding letter written by the collector to the fiduciaries (and kept together with the Will and/or trust agreement) which art works should be sold, which pieces should pass to various family members, and which pieces should be donated to art museums. Ideally, in addition to outlining specific distribution of the art, the collector should also have communicated these desires to family members and acquired assurance in advance from any charitable entities, such as local museums, that they would willingly accept the art, and, relatedly, the collector should have made a determination as to whether seed money should be attached to those donations to ensure that the recipient can maintain the artwork.
If the collector prefers that all of the art be sold at his or her death, would he or she like to provide a right of first refusal to friends and family to purchase the art before going to auction? If the client wants specific pieces to be distributed among his or her children (and for the remainder to be sold), and has a goal that children should inherit equally under his estate, should there be an equalization clause to provide one child with cash in the event that the other child receives a more valuable piece of art? Depending on the value of the art, consideration should also be given as to how the burden of the estate tax should be shared among beneficiaries. - The Benefits of Lifetime Gifting and Options for Structuring Gifts of Artwork. A collector with a sizable collection may want to consider gifting artwork during life. Lifetime gifting can provide several advantages, including clarifying the collector’s wishes, minimizing family discord and estate disputes after the collector’s death, and utilizing the historically high lifetime exemptions from the estate and gift tax. As the term “gift” implies, in order for the “gift” to be completed and out of the collector’s estate for estate tax purposes, the collector must part with dominion and control over the asset. There are many vehicles available – for instance, transferring the artwork to an irrevocable spousal lifetime access trust [as described here], the creation of a limited liability company designed to hold title to the artwork (and to stipulate a protocol for managing and housing the art) from which the client-collector could gift membership interests over a period of years to various family members (either outright or in trusts for their benefit) and potentially acquire a discounted appraisal for the fractional interests. While this advisory focuses on gifting to non-charitable beneficiaries, it should be noted that philanthropically minded clients may also incorporate charitable entities into their lifetime gifting plans through a variety of estate planning vehicles [as described here].
Art collectors should know what they own, keep good records, choose the right stewards for the art, and work with estate planning counsel to create a clear process for either distributing art after death or gifting art during life. If any of these points resonate with you and your collection, please consult with your Wiggin and Dana attorney.