As a trusted advisor, it’s essential to understand how to support your clients best when they inherit artwork. The experience can be exciting and overwhelming for them, as they hope for a valuable inheritance but fear it may be worthless. Like on “Antiques Road Show,” where people discover the true worth of their possessions, your clients will turn to you for guidance.
When clients inherit artwork or other collectibles, a significant portion of their net worth becomes tied to tangible personal property. According to a recent Barclay’s Wealth Insight Report, these treasure assets can account for up to 10% of a client’s wealth in the U.S. and 20% globally, particularly for mid-tier clients. Your role as an advisor is to help your clients strike a balance between their existing investments, legal and financial planning, and the specialized planning required to manage these unique assets.
While you may assist with executing specific instructions from your clients regarding selling, purchasing, or donating items, your responsibilities go beyond that. You may also track the collection on their balance sheet, arrange financing for acquisitions and maintenance, and provide overall support in handling the newly inherited collection.
By providing your expertise and guidance, you can help alleviate the emotions and uncertainties of inheriting artwork, ensuring your clients feel confident and supported throughout the process.
The primary concern for your clients lies in their lack of knowledge regarding the actual value of inherited artwork and collectibles. Unlike stocks, bonds, or real estate, determining the value of these items is not readily accessible. Before seeking expert opinions on their worth, it is crucial to assist your clients in adjusting to their newfound ownership of artwork. This involves three essential steps: 1) creating an inventory of the collection, 2) streamlining the collection through aggregation, and 3) establishing a foundation for managing your client’s collection. These steps are necessary to prevent underselling rare pieces or investing a significant amount in items with legal ownership or other defects.
Step One: Inventory
Many collectors lack a comprehensive inventory of their assets, and if one exists, it often lacks critical information or is highly cryptic in format incomprehensible to their heirs. Estate inventories are typically focused on minimizing the estate tax value of assets and are seldom complete or adequately detailed. Additionally, confusion arises when artists work in various media, making it challenging to attribute specific artworks to their creators within the collection. Therefore, expert assistance is necessary to describe assets for the inventory accurately.
Step Two: Aggregate
Even when all significant artwork is correctly inventoried, researched, labeled, and stored, your client will likely be faced with many items, sometimes numbering into the thousands. These include not only easily recognizable valuable art, coins, gemstones, jewelry, furniture, and other collectibles but also the associated masses of documents, catalogs, notes, letters, bills of sale, and paperwork. While it may not seem like much, a single piece of paperwork can be crucial in determining the provenance and value of an item. To support your client and their new collections, each with its own set of taxation, provenance, and valuation issues, it is essential to assist them in simplifying these matters.
Taxation: Your client's income from transacting tangible assets is subject to different tax treatment than their investment or ordinary income. How your client handles ownership of the collection will dictate the subsequent income tax treatment when buying or selling tangible assets. In the US, for instance, the IRS recognizes four distinct types of taxpayers based on their role before a transaction: Collector, Investor, Business Investor, and Dealer. By default, the IRS assumes your client is a Collector, imposing the highest capital gains tax and allowing the fewest deductions. However, your client may qualify for an Investor's more favorable tax status. Qualifying as an Investor is not as simple as making a declaration; it requires a well-documented pattern of behavior by your client. With the guidance of a qualified expert, your client can position themselves to obtain the most advantageous tax status.
Recognition: Aggregating the collection involves considering the stability and volatility of pricing and factors such as questionable legality or uncertainty regarding the client's legal ownership of items. Establishing the legal title, or provenance, of artwork and collectibles is crucial for clients to either retain ownership or obtain a fair market value when selling. However, the art market is even more unregulated and opaque than real estate.
Liquidity: The ease of selling an item is another crucial aggregation aspect. Rare or unique items alone may not provide sufficient liquidity; they must also be sought after by those willing to pay for ownership and control. A highly sought-after item can be sold quickly, even if poorly executed or damaged, while a flawlessly executed piece may struggle to find a buyer for months or years.
Premium: Sometimes, clients may inherit items they can only dream of owning unless they are prepared to compete with the most affluent collectors and institutions at auction. These premium items exist in a league of their own and require expert assistance in managing preservation, transfer, or sale.
Step Three: Collection Management
As an advisor, you may have limited or no active involvement in the buying and selling of art and collectibles. However, you still have a crucial role in supporting your clients with effective collection management. To best serve your clients in this aspect, it is essential to assist them in finding professionals with the necessary expertise and experience in managing their collections. Begin by collaborating with your clients to address the following considerations for collection management and planning:
- Does your client have a comprehensive understanding of the buy-sell discipline related to their collection?
- Does your client’s personal representative possess the knowledge to effectively maintain and eventually dispose of artwork within their estate?
- Are there insurance policies or estate funds available to alleviate the burden of administrative and tax costs associated with the collection?
- Do your clients keep comprehensive purchase and sale inventory records?
- Has your client specifically addressed the disposition of any copyrights they may own in their Will?
- Are there specific instructions or restrictions regarding the usage or licensing of collection items?
- Has your client made appropriate arrangements for the maintenance and storage of the collection within their estate?
- Has your client considered the benefits of utilizing split-interest trusts and charitable foundations for effective art management?
With the passing of the Baby Boomer generation, your clients will likely inherit significant collections of artwork and collectibles. Although the collection may not compare with the financial value of their ownership in a family business, emotionally, the possession of artwork can be of very high value. Your role is to support them as the new owners of these collections. To achieve this, you must help them acquire the necessary expertise and experience to inventory their collections properly, streamline management through aggregation, and prepare for the eventual transfer of their collections to future generations.
