If you’re like most professionals, you count art collectors among your clients. Perhaps you’ve advised them regarding donating a piece of art to their children, a fundraising auction or a museum collection. But, sooner or later, the collector will ask you for assistance with the collection as a whole. If he doesn’t ask you himself during his lifetime, his heirs will ask you afterwards.
A collector has four choices regarding his collection: (1) give it to his family during life, (2) bequeath it to his family at death, (3) give it to a charity during life, or (4) bequeath it to a charity at death. Each of these choices has advantages and disadvantages.
Lifetime Gifts to Family
In my experience, lifetime family gifts of art tend to be the least frequent choice. Many collectors are loath to part with pieces of their collection, and their children’s tastes and available space may differ substantially from their own. If such a gift is made, you should consult an art specialist to address art-specific issues, such as provenance and copyright. Consider reminding the donor to change the insurance (for example, owner and location) because that’s one item that the Internal Revenue Service will ask about in an estate tax audit. Speaking of the IRS, gift tax reporting will be required for substantial transfers.1 Consider the need for a qualified appraisal if the donor wants the statute of limitations to close on the valuation on his gift tax return.2
Bequest to Family
Significantly more common is the collector who simply bequeaths the collection to his family as part of the personal property of the estate. Unless the client’s family has similar taste or keeps some pieces due to family history, the advisor’s role may be to help identify the appropriate auction house to sell the art. If the art is sold before the estate tax return is filed, then the IRS is likely to accept the auction values for estate tax purposes. Otherwise, a valuation will be required,3 along with the attendant valuation discussions with the IRS during the estate tax audit.
Lifetime Gifts to Charity
Giving art to charity during life may be a satisfying or frustrating exercise. Donors are often confused regarding the deduction rules and may end up disappointed at tax time. A donation of art to a charity that will use it in the charity’s exempt function generates a deduction for the value of the piece,4 assuming the other paperwork (appraisal, acknowledgment letter and Form 82835) is obtained. On the other hand, a donation of art for a charity auction, even to an art museum, will result in a deduction for the lower of value or the donor’s basis6 (yes, appraisal, letter and Form 8283 are still required7). Even if the initial donation qualifies for a fair market value deduction, if the charity disposes of the art within three years of the donation, the benefit of the “related use” deduction will be recaptured8 (the deduction is reduced to “lower of value or basis”). The recapture will be avoided if the charity provides a letter stating that they used the donated art, but the use became impractical or infeasible, so they had to dispose of it.9
Bequest to Charity
A bequest of art to charity isn’t subject to the income tax limitations, nor is valuation a significant issue, but the gift may come with other potential problems. Unless the donation is planned in advance, the museum or other charity may not accept the art, especially if the testator wants to impose conditions on the sale or display of the collection or if the art bequest isn’t accompanied by a cash bequest. Collectors with significant collections should be encouraged to reach an agreement on these arrangements in advance and not leave them to the executor. Even if the collector has reached an agreement with a museum, who will be there to enforce it after he’s gone? Consider the mechanism adopted by families in two private letter rulings: the right to enforce the agreement was given to their family foundation, although the art itself will be transferred to a museum. The IRS approved their plans through the PLR process.10
Advance Planning Required
Whatever the clients’ planned disposition of their collection, this is an area where advance planning, especially for significant bequests, may avoid significant future headaches.
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1. Internal Revenue Code Section 6019.
2. Treasury Regulations Section 301.6501(c)-1(f)(3), Treas. Regs. Section 301.6501(c)-1(f)(1).
3. Treas. Regs. Section 20.2031-6(b).
4. IRC Section 170(e)(1).
5. Treas. Regs. Section 1.170A-13.
6. IRC Section 170(e)(1)(B)(i).
7. See supra note 5.
8. IRC Section 170(e)(7)(A).
9. IRC Section 170(e)(7)(D).
10. See Private Letter Rulings 200202032 (Oct. 26, 2001) and 200418002 (Jan. 23, 2004).