Whether collecting art is one of your passions or more of a hobby where you pick up a piece or two whenever you travel, your art collection may be one of your more valuable assets. As you embark on estate planning, what is the best way to address this collection?
The answer to that question depends on what you want to happen to it after you’re gone as well as how your family feels about it. If you want your collection to remain in the family and one or more of your loved ones care about it (almost) as much as you, the challenge you’ll face will involve transferring it to them with minimal tax implications.
Taking action
You’ll want to start by getting it appraised so you know its fair market value (FMV). That will help determine how to leave it to your heirs. If it’s worth millions of dollars, it could trigger estate and gift taxes – especially if you’re leaving them other considerable assets. Even if you gift the art now, you need to be mindful of gift taxes that your loved ones may have to pay.
What about a sale leaseback?
Utilizing a sale leaseback is a strategy that can allow you to leave valuable art to someone in your estate plan without financial consequences. Here’s how it works. You sell the art to an heir or other beneficiary (on paper only) at FMV and then make lease payments to them for the right to keep it. This takes the art out of your estate, which decreases its value (and potential for estate taxation). Meanwhile, your lease payments provide regular income to your beneficiary.
Since nothing is without potential tax consequences, your beneficiary will need to report your lease payments as income and pay taxes on it. Further, since you’re technically selling the art, you’ll likely pay capital gains tax if it’s increased in value since you bought it. If you choose to use the sale leaseback strategy, it’s critical that you get the FMV correct. Undervaluing or overvaluing it can both have unwanted tax consequences.
There are other options for handling an art collection through trusts. Ultimately, it’s wise to first talk to your loved ones about their interest in keeping it in the family and maintaining it after you’re gone before committing to any particular strategy or strategies. You can then decide, with experienced estate planning guidance, the best way to transfer it to them or perhaps to a charitable organization, art gallery or museum.