If your client has a significant art collection, you’ll likely need to work with different professionals to manage its disposition when the client dies. You may need to consult with an auction house, a fine arts broker or even a colleague who understands the tax implications of owning and selling artwork. We asked three professionals in each of these areas questions about what they’ve seen in their practices and the advice they would give to estate planning and financial professionals. Here are their responses.
Communication is Key
One issue that comes up a lot from the auction house perspective is communication between the client and her family about her wishes concerning the collection. Bonnie Brennan often sees this issue in her work at an auction house. Here are her observations:
Why is it important for your client to communicate with her family about her wishes concerning her art collection? An individual’s art collection is very personal, and planning for it often is more emotional. Family members may have more of a personal connection to tangibles than to other assets they hold. During a collector’s lifetime, if possible, it’s very helpful to discuss a client’s wishes for her collection, to address important questions such as:
1. The family’s possible desire to keep all or a portion of the collection, as well as their understanding of the value of the collection and the implications the collection value might have on their ongoing expenses (insurance, storage and upkeep, for example).
2. The possibility of donating the collection to a museum or selling the work and generating funds for a charity. Clients should discuss these objectives and the importance of a philanthropic legacy with family to manage expectations.
3. How does a client wish for the collection to be sold? Is she interested in private or public sales, and, if sold publicly, should the collection be sold anonymously or as a named collection?
A wonderful case study of great advance planning is the story of David Rockefeller, who discussed openly with his family his intentions during his lifetime for the collection to be sold publicly and for the sale to benefit philanthropic causes he and his wife Peggy supported throughout their lives. Their daughter Peggy Dulany explained: “We knew the plan all along, so we never expected to inherit the art.”1 Their children collaborated with Christie’s to ensure the strongest results were achieved in support of their parents’ financial and philanthropic goals, ultimately resulting in the highest collection sale and charitable sale at auction.
What types of problems have you seen come up if the client hasn’t communicated before she dies? Lack of clear communication and difference of opinion among family members can often lead to family squabbles or lawsuits over the dispersal of art collections in an estate. Additionally, if a client intends to donate works from her collection to institutions, she should start a dialogue with the institution during her lifetime. If left uncommunicated to the institution, there’s no guarantee the artwork will be accepted or exhibited as the collector may have wished. If donated, communication with the institution regarding time on view (versus in storage) and designation (named or anonymous gift) should be addressed, along with the collector’s level of comfort in allowing the museum/institution to sell the work in the future. Some institutions will only accept gifts with no stipulations.
Diversifying Holdings
Some clients may be looking at acquiring art as an investment opportunity. Judd B. Grossman, an attorney and tax expert, offers this advice:
What type of issues should high-net-worth (HNW) individuals consider if they’re interested in or are in the process of building an art collection? Many investors and HNW individuals are now viewing art as a way to diversify their investment holdings.
Art is a unique type of asset, and the art market exists in a unique legal landscape. Other types of investment assets (for example, real estate or securities) are governed by special sets of rules tailored to the particular type of asset and its unique quirks and challenges. But, most art transactions are generally governed by each state’s own version of the Uniform Commercial Code Article 2—the same code that governs sales of any goods over $500; widgets, livestock and electronics. With a piece of land, public records can give you a lot of information about who owns it, who’s owned it and who has a mortgage on it. With a stock, you can look at required reports to get information about the asset. But, art deals generally aren’t subject to these types of mandatory reporting requirements.
You would think that this state of affairs would make HNW individuals more careful. But, many of them—the same ones who would demand extensive diligence and a detailed written contract before entering into a real estate or business transaction—will do an art deal of the same dollar value with minimal diligence and a handshake and memorialize it with a 1-page invoice.
Your clients should treat art investments the way they would treat other investments. They should:
• Consider working with an advisor (with whom they should have a clear written document defining their relationship and terms and how the advisor will be compensated).
• Do their diligence; understand the market.
• Not just take a seller’s or dealer’s word for anything; ask for documentation of a work’s title, provenance and condition.
• Understand what kind of certainty is possible in the way of title and authenticity. We don’t have a time machine to go back and check who painted a work and who’s owned it in the past, but that doesn’t mean that there are no steps that can be taken to make our best assessment.
• If possible, use a contract that’s more comprehensive than just an invoice; savvy collectors can now ask for representations and warranties and other contractual protections that help to allocate risks in the event that something goes wrong.
• Understand that their “asset” is a fragile physical object. Considerations like transport, storage, insurance and conservation can make a huge difference in protecting their investment. I’ve seen disputes over works that have been broken or ripped, poorly restored or otherwise physically damaged.
Options for Sale of Art
If you’re an executor of an estate with a large art collection, you need to consider the right option for beneficiaries who want to dispose of the collection. Ray Waterhouse, a fine art broker, emphasizes that other options exist aside from placing the artwork up for auction. He also discusses ways a specialist with knowledge of market prices can help collectors and estates to minimize taxes.
What other options does an executor have aside from placing the artwork up for auction? Estate trustees have a fiduciary duty to the beneficiaries when disposing of artworks, and “fiduciary duty” is often taken to mean that consigning the entire estate to an auction exercises that duty. It’s assumed that by achieving market value, the trustee has done what’s required. While there are certain advantages to auction consignments, there are other options, and we believe that having independent and specialist art advice is very helpful to trustees. The small fee advisors charge can be repaid many times over.
For example, one of our clients was a New York art collector with whom we had assembled a world class collection of Impressionist and Post-Impressionist art. After his sad passing in 2013, one of the trustees entrusted us to sell some key works. We placed them in private and public collections, achieving high prices. Towards the end of our allocated period, we had a cash offer of $8.5 million for a Cézanne. The trustees decided at the last minute to put the remaining works into an upcoming auction, and the results were very poor. The Cézanne achieved a hammer price of
$7 million. Some works didn’t sell and have the unsold tag on public record.
A good art advisor can help a trustee decide the best options for a collection or for individual artwork, including: in which country to sell the collection or individual artwork; whether to offer them in a discreet private sale or more publicly through consigning the art to a recommended gallery; or whether to donate some pieces to a museum for philanthropic and tax reasons. At the very least, an expert advisor can help determine where and when pieces should be offered and at what price. And, if works are consigned to auction, an advisor can help on estimates and negotiating the best commission structure.
An art broker can also advise a collector (prior to death) and his wealth managers on two aspects of tax law: capital gains tax and sales tax. As the holding period impacts capital gains tax, an art advisor’s knowledge of market trends can be helpful. For example, if art is held for more than one year, federal capital gains is 28% for art and collectibles, whereas if the art is sold within a year, the gains can be as high as 37%, thus making the decision of when to sell an important one.
For sales tax, using freeports such as Delaware to receive and hold artwork can result in no sales tax being paid on acquisition. There are also strategies in certain states that allow museum loans to help a collector avoid sales and use tax.
In estates, the beneficiaries need to determine if a higher or lower appraised value is beneficial. An art advisor can assist with the valuation process to make sure goals are met. For example, with a lower valuation, sales shouldn’t be encouraged for two years. While auction houses may have a conflict in their valuation process to encourage receiving a collection, values should be true and correct as the Internal Revenue Service can require a revaluation if artworks are sold within 18 months of death.
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