There are few financial decisions these days that do not involve taxes. Buying, owning and selling art all generate significant tax liabilities that art collectors need to be aware of. This final article of a three-part series on art and taxes takes a closer look at how estate taxes may affect the choices collectors make regarding the ownership of an artwork.
On February 6, 2016, the New York Times published an article by CNBC wealth editor Robert Frank headlined: Revaluing Family Treasures for the Taxman. According to the article, the auction sale price of about $35.8 million for a 1957 red Ferrari made it one of the most expensive cars ever sold. Prior to this auction, the family had estimated the value of its entire collection of vintage Ferraris at $78 million, but the auction results seemed to confirm the assertion by some experts that the collection could be worth more than $200 million.
The disparity between the two estimates of the collection’s value, the article suggested, is likely to raise the interest of the French tax authorities.
Like vintage racing cars, art is a difficult asset to evaluate when it comes to estate and tax planning. For starters, there may be sentimental value attached to a particular painting or sculpture, which means complications can arise when dividing an estate among heirs. And beyond sentimental attachments and potential authenticity or title issues, art is also an illiquid asset that poses challenges when assigning value.
In October of 2015, the IRS announced the estate and gift tax exemption for 2016: $5.45 million per individual, up from $5.43 million in 2015. In most cases, if estate taxes are due, they have to be paid within 9 months of the date of death. This small window means that inheritors may be forced to sell estate art at a discount to foot the tax bill. For those who have an art collection and other assets that are likely to be subject to estate tax, it makes sense to start planning during their lifetime, and as soon as possible.
Art collectors certainly have options. One tactic is to take advantage of the annual gift tax exemption ($14,000 for 2016) and make gifts to children or others in their wills. Collectors can also donate art to a charity and claim a charitable tax deduction.
If there are works in a collection that heirs don’t want, or that cannot be donated to a charity, it may be in a collector’s interest to sell some of the pieces when the market is in his or her favor, rather than in a rush to beat the estate tax deadline after the collector’s death.
For some high net worth collectors, it can make sense to do more sophisticated estate planning, such as putting the art in a trust or borrowing against the collection. It’s important to work with a highly competent trust and estate attorney who can advise on the pros and cons of each strategy, including whether they make sense from a cost-benefit perspective.
Whatever course of action is chosen, collectors have to bear in mind when filing taxes thatan appraisal has to be submitted for every work of art listed on the tax return with an individual value over $5,000. Appraisals submitted for artworks with an individual value over $50,000 are reviewed by the IRS Art Advisory Panel.
According to its 2014 Annual Report, of the 315 items that came up for review, the Art Advisory Panel recommended total net upwards adjustments of $55,706,000 in estate and gift tax appraisals, a 23 percent increase. The net downwards adjustments for charitable contributions totaled $2,077,000, a 55 percent reduction. So it’s important for collectors to make sure their appraisals reflect the fair market value of each piece. Working with a qualified Uniform Standards of Professional Appraisal Practice (USPAP) compliant appraiser will go a long way to protect the interests of all involved.
This article was written by Annelien Bruins and published by Hamptons Art Hub.