Private family offices are increasingly being called upon to manage tangible personal property and art collecting has come to be viewed as a legitimate asset diversification strategy writes Suzy Peterfriend Ross. Certain categories, contemporary art in particular, are currently outperforming other more traditional investment options.
Family office professionals must become at least conversational about the issues surrounding art and antiques because the value of these assets is often considerable in the calculation of net worth. Devising a strategy to transfer this wealth to the next generation of the family is an issue that deserves special consideration.
The family might want to broaden the composition of its staff to include an art advisor or curatorial professional. If your family is more moderate in its collecting, there are issues you will want to pay attention to when dealing with art, antiques and collectibles. Here are 10 considerations that should get you started:
1. Collectors are almost as passionate about what they collect as they are about their grandchildren
Pursuit of desired objects may absorb inordinate amounts of the collector's time. Commitments will be broken, priorities restructured, and budgetary considerations thrown to the wind when word of the availability of a highly desirable object leaks through the network of dealers, other collectors, and curatorial professionals.
The advisor's role is to facilitate the acquisition and, if you are smart, share in the joy of taking possession of the object of desire. Passionate collectors often have difficulty discussing the ultimate disposition of items in their collection. They may respond to your question as to where they would like the Degas to end up with a perplexed expression and a furrowed brow. They cannot contemplate not having the Degas in its place of honour.
Encouraging the collecting members of your family to consider the ultimate disposition of these assets is a worthy mission, but one that must be handled gingerly.
Generally, the options include keeping the collection within the family either by passing the objects outright to members of the younger generations or to formulate a trust or foundation that will allow the younger generations to assume management of the collection in some fiduciary capacity.
A second option is to donate the collection to a museum or other charitable organisation; this allows the collector to leave behind a legacy that benefits a broader range of people beyond the immediate family. And a third option is to liquidate the collection and convert it to cash.
2. Art and antiques assets are commonly overlooked in the estate planning process. Double-check the asset inventory to be sure the legal team has contemplated these financial assets for tax and estate planning purposes.
Estate planning professionals frequently fail to plan sufficiently for the disposition of art and antiques when they are structuring the transfer of wealth. Most advisors do not take collections into account unless there is a very notable piece, and even then they often fail to consider the rest of the collection.
Unfortunately, this, along with the collector's reluctance to address the subject, results in a plan that has omitted what is increasingly a significant aspect of the family's net worth.
Another complicating variable is the fact that collectors frequently do not realise that items they acquired years ago now have a far greater value than they ever imagined.
But while the family may not have paid attention to its collection's value, the tax authorities eventually will.
In many countries, a valuation of the collection will happen upon the death of the collector, and some advisory teams are surprised with an estate worth a great deal more than they originally planned for.
There are frequently tax implications whether a piece is being transferred at the time of death, during the collector's life, or sold.
The family office staff should make sure that the estate planning team is aware of the presence and nature of these assets and how they affect the tax burden on the estate and the family.
3. Art and antiques assets need to be looked at individually to identify title or condition problems or issues that require special tax planning.
Historically, estate planners have looked at a collection in the aggregate – not as a group of individual items that might have unique issues that need to be considered during the planning process. Collections are generally an amalgamation of items that differ in quality and value. It is important that the family office looks at each piece individually and evaluates it for potential problems that require attention in order to preserve or maximise the value of the piece.
Provenance: The ownership history of an item can have tremendous impact on its value. Celebrity of prior owners, museum display, and a well-documented chain of title tend to increase the value of an object. Not having a clear record of title transfers, gaps in the chain, and questionable transactions tend to lower the value of a piece. These issues can raise concerns of theft, forgery, title, and authenticity.
Condition: The condition of a piece will greatly alter its value. The office should be mindful of works that have been damaged by environmental or handling issues and require conservation or restoration. The office should also pay attention to how a piece will be stored, shown, and crated if it is being loaned or moved.
Title: Actual ownership of a piece can sometimes be in question, even if the piece has been in the family for some time. The newspapers have recently headlined stories about objects that were confiscated by the Nazis and family attempts to repossess pieces that have been missing for years. Title issues also plague antiquarian pieces that have been illegally removed from countries that are now seeking the return of valuable cultural objects.
Tax planning issues triggered by appreciation or loss: In the US and other countries which tax the appreciation of value at the time of a transfer, the tax planners will need to be made aware of highly appreciated works which may require special planning. The tax laws of the relevant jurisdiction will need to be examined to determine if a sale or transfer should be handled in a particular way.
4. Moving art objects from one family home to another at the death of a family member without reporting the transfer is probably tax fraud – the statute of limitations for tax fraud never runs out in the US.
Families who fail to formally plan for the transfer of an heirloom piece sometimes simply move the object out of grandmother's house. The John Singer Sargent reappears over the mantle in the son or daughter's home. This approach to art succession can cause unanticipated problems.
In most jurisdictions, this painting is part of grandmother's estate and needs planned for as such. A transfer may go unnoticed for years, but it will come to light when there are external circumstances that require liquidation of the piece, sometimes by even the next generation. There is no statute of limitations on tax fraud in the US so family members several generations later may find themselves being assessed arrearages, penalties, and interest for manoeuvers that took place 60 years ago.
5. Museums do not always want and do not always keep items donated by well-intended collectors.
Collectors who are interested in leaving an art legacy often wish to leave one of their pieces in the permanent collection of their favourite museum. They will offer the piece as a gift during their lifetime or leave it as a bequest in their will and the family is often stunned to learn the museum has no interest in it.
A museum is an idiosyncratic beast, and will refuse a piece for any number of reasons. It may not collect the kind of item being donated, regardless of its quality. The piece, although treasured by the collector, may not in fact be of museum quality. It may also not want to accept a piece due to the costs involved in caring for, displaying, insuring, and conserving it.
With a few rare exceptions, a museum's permanent collection is not really permanent and many have their own agendas.
Museums are deaccessioning gifts they have previously accepted at an astonishing rate. They may think they have too many pieces by the same artist already, or simply that the ones already in the collection are more interesting or representative.
6. An auction sale is not always the best way to liquidate a collection.
There is a general sense in the professional community that auctions are the primary way art and collectibles are sold. In the US, when a collector dies, the probate attorney calls the local auction house and the entire collection is consigned for a speedy sale in order to meet the filing deadline of the federal estate tax return.
Auctions can be a very effective way of selling art, and a well-planned auction can bring prices close to fair market value for properly positioned pieces. Any number of things can influence the success of a public auction.
Tastes vary geographically and houses can have reputations for certain types of items; this changes the makeup of the buyers bidding on the collection. Collecting trends can change and the state of the economy will have an effect. Auctions can offer buyers great bargains, but they can also provide sellers big disappointments if reserves aren't properly set.
The alternative to a public auction sale is a private sale through a dealer who has experience in the type of objects in the collection. The downside to this approach is that the objects will not all be liquidated on a date certain. But this approach often preserves the value of the collection more meaningfully.
7. Auction house personnel should not be used for appraisal – they have a vested interest in bringing the items in under consignment and setting a favorable reserve.
Auction houses are primarily looking out for what is in their best interest, not the collector or the family. They will estimate a pre-sale value, but that will be based on what they think they can get for the item at auction. This is not the same as an appraisal. The taxing authority in your jurisdiction is likely to have rules about who qualifies to offer an appraisal of value that the authority will recognise.
It is wise to work with a qualified appraiser prior to consignment so that you are clear on the value of the work and can set an appropriate reserve.
The reserve is the minimum price the piece will be sold for. This can never be lower than the low-end of the pre-sale estimate. Auction houses have some of their reputation tied up in how well pieces sell.
The auction house estimate of value might be a low number, because they are hoping to attract more buyers. Or the number may be too high with the result that the piece will fail to sell.
8. Art can be used as collateral for borrowing.
When the collector or the family needs to liquidate an object in the collection, there are alternatives beyond an outright sale. Art can be used as collateral for a loan in which the art itself is the security. In most cases, companies will lend up to 40–50% of the value of the object. Many companies will allow a line of credit against the piece, which gives the collector significant flexibility. Loans against the collection in an estate can be a way to pay the estate tax liability.
Borrowing against the collection has the benefit of creating liquidity and can provide other advantages. One of the most important advantages is that borrowing against the art avoids any tax on the appreciation that would be triggered by an outright sale. A loan also allows the collector to retain ownership of the art. The transaction costs for a loan are usually considerably less than that of a sale.
9. Art can be used very advantageously to support charitable causes other than museums.
In jurisdictions that allow a tax deduction for charitable contributions, gifting art can be a meaningful way to support the causes that are important to the family. In the US, the amount of the charitable deduction is determined by the status of the receiving organisation.
If the donation is made to a "related use" organisation, such as an art museum, the collector may deduct the fair market value of the piece. If the gift is made to a hospital or university, examples of a non-related use, the deduction is limited to the cost basis.
Some jurisdictions also have statutory tools, such as a Charitable Remainder Trust in the US, which facilitate a charitable gift and can also create income for the donor. Family foundations partially funded with art and antiques assets can also provide philanthropic capital so that the family is able to benefit the institutions that reflect their personal values.
10. Art is one of the most profound ways to leave a family legacy.
Collectors often view art as a way to give something back to the world that might not otherwise be available to the public. Art can also provide a tie between generations of a family in a way that other assets cannot. The continuity created from grandparent to grandchild with a gift of artwork has emotional power and resonance.