1. Not considering how you are classified – are you a creator, a dealer, an investor or a collector?
Creators, dealers, investors and collectors are all treated differently for tax purposes. Make sure you know how you are classified.
2. Adopting the Moving Van Approach.
Don’t advise your family to hire a moving van to make your collection mysteriously disappear at your death. There is no statute of limitations on tax fraud. If your collection goes unreported, the IRS can go after your family for back taxes, interest and penalties long after your death. Plus not paying required taxes can affect your family’s ability to sell items in the future.
3. Failure to Plan
If you are a collector or an investor, your collectibles are subject to a 28% capital gains tax -- not the 15% imposed on the sale of other capital assets such as stocks. In addition, your collection will be subject to estate taxes at death. Consider giving pieces away during your lifetime but make sure you speak with an advisor first. The tax implications of selling or gifting your collectibles can be substantial.
4. Not realizing the true value of “stuff”
Get your collectibles regularly appraised by an experienced and qualified appraiser for insurance purposes as well as gift and estate purposes. In the event of damage or loss, you will want to be fully reimbursed for the value of your collection. Any gift of tangible personal property that exceeds $5000 in value must be backed up by a qualified appraisal done by a qualified appraiser.
5. Not Maintaining an Up to Date Inventory
Without an organized inventory, you can’t possibly plan for the distribution of your collection. Keeping an inventory can be as simple as creating a computer spreadsheet or using specially designed computer software. With an up-to-date inventory, you can keep track of the provenance of an item – which will be of utmost importance upon any subsequent sale.
6. Not Keeping Records of Your Purchases and Sales, Location and Authentication Documents
The history or provenance of any item is of utmost importance when it comes to value and future sales. We’re all aware that the history or chain of title can help you establish an item’s authenticity. But you also need to be aware of where the item is and whether it can be freely moved.
7. Not properly insuring a collection
Insurance is key. Collections can be insured as part of the contents of your home, scheduled items or blanket coverage. Accidents happen all the time.
8. Not Having a Conversation with Heirs
Your collection may be of utmost importance to you, but does your family want it? Come up with a plan and speak with family members about the plan. Your spouse or children may not want the collection but they probably want its value. Don’t expect 2 children to share one beloved item. Family tensions can be avoided with proper planning.
9. Not Identifying Charities for Potential Charitable Giving
Identify the charities that you would like to benefit and create a framework for charitable giving. You need to know if the charity will accept your gift and whether it should be outright or in trust.
10. Not Utilizing a team of experts
You should familiarize yourself with dealers, appraisers, museum curators and other collectors in your area of collecting. Experts can keep you in the loop about what’s selling, who’s buying, for how much and help you find the one-of-a-kind pieces that you’re looking for. But a team of advisors also includes an attorney, a financial advisor, a tax specialist and a succession planner. Be sure that every one of those advisors knows the nature, extent and value of your collection and how you wish to dispose of it so that your advisors can assist in putting a proper plan in place.
Caryn B. Keppler, Esq., is a Trust & Estate Attorney at Putney, Twombly, Hall & Hirson LLP in New York City.