If your client pores over auction catalogues as though they were sacred texts and has remarked that a $250,000 tourbillon is “a fair value,” he just might collect passion assets.1 Wines, watches, comic books or first editions, it’s a big tent. Often, such troves can hold considerable value. How do you dispose of a collection among multiple heirs? How do you sell it off if they really want cash?
Face the Facts
The client must first acknowledge that he’s a passion asset collector. If he’s spent many of his happiest moments as the high bidder in various auction rooms, it may not be evident to him that this experience doesn’t hold the same joy for his heirs. Indeed, these high bidders may have been prepared to pay materially higher prices for their objects and simply didn’t have to. Passing such a world view on to heirs with no interest in the objects can widen an already large communications gap.
Having a collection appraised during life, as part of the larger exercise of understanding what assets a client owns, helps him move from passion toward commercial reality. A responsible appraiser considers an item’s condition; accompanying trade dress and packaging; provenance; market trends; and whatever else may be relevant to value an item in a particular asset class. For example, a client may know a fair amount about wristwatches without realizing how much the value of a favorite piece has declined because he’s mislaid its presentation box or worn the watch so often that the original manufacturer’s strap had to be replaced by a third-party product, even one of similar quality. If your client is a serious collector, the appraiser should have appropriate specialist knowledge, or else his work product is unlikely to be of much value.
The collector client can also journey from passion to familial reality. Frank discussions with prospective heirs regarding their intentions should they inherit passion assets can help ensure that the assets’ maximum value—whether financial or psychic—will be realized.
Since long-time collectors may hold pieces that have substantially appreciated, there can be a significant after-tax difference between a collection acquired by the client in his own name (which will earn a basis step-up at death2 and likely avoid any material tax on a sale soon thereafter) and the same collection acquired during the client’s life from an irrevocable trust set up by the client’s parents for his and his lineals’ benefits (so that the client’s death won’t bring a basis step-up, and appreciation will be taxable on sale). If the tax bite is big enough, his heirs’ views regarding a sale may change.
The means by which a collection is held also impacts how the collector can implement his wishes. Using powers of appointment or non-binding memoranda of wishes can often effect the desired disposition of a trust-owned collection, but they’re coarse tools compared with the power to deal with directly owned assets. If the respective views of the trustees and the deceased are consistent, there may be little cause for concern. Otherwise, trustees can choose to ignore memoranda of wishes and endeavor to use their discretion over trust assets remaining under their control in ways inconsistent with the goals envisioned by the decedent.
If the collector learns that his heirs intend to keep the objects, he must give attention to their equitable disbursement. If the heirs will be happier if the objects are converted to cash, the collector can educate his executor during life as to how this liquidation can most effectively be accomplished when the collector is gone.
Baby, Please Don't Go
If a collection is to remain in the family, how many of the heirs are to receive it? If it’s to go to some, but not all, of the collector’s heirs, is it valuable enough relative to the estate as a whole to warrant a make-up distribution to the others? If more than one heir is to receive the passion assets, how are they to be divided up?
The client can retain complete control via long lists of specific bequests, but maintaining those lists can be burdensome. Collectors buy, and sometimes even sell, pieces. Lists quickly get outdated, and re-division among beneficiaries can be a nightmare. Indeed, lists may require updating even in the absence of purchases or sales, as values within a static portfolio of passion assets change at what can be materially different rates, similar to a static portfolio of equities. Issues can arise on the beneficiaries’ side, too: If they’re also collectors, it’s unlikely that their particular interests in their benefactor’s collection will remain constant as their own collections and collecting interests mature.
If this baggage is more than a collector wishes to deal with, he can simply leave the division of his collection to his executor. That approach permits decisions to be made on the basis of a current inventory, on the current state of the market and on the heirs’ current frames of mind, all as they exist at the collector’s death. However, for a collection of any size, an executor who lacks the specialized knowledge of the deceased may find the task to be daunting, unless a dealer or other industry professional is engaged as a consultant.
Finally, selection may be left to the heirs themselves, commonly through some sort of rotation system. But, this superficially straightforward reliance on self-interest itself presents subtleties. Someone has to decide how items are to be lotted. When do separate pieces comprise a set? Is the determination based on how the market prices items or on how the collector chose to collect them? Are there synergies to be capitalized on because the collection is notably complete in some respect or other?
Further, the system of rotations selected can materially affect results. Suppose the client’s collection has 12 items, 1 through 12, evenly declining in value from $12 to $1, and three heirs, Alan, Barbara and Charlie (oldest to youngest). If we simply let Alan pick first each round, Barbara pick second and Charlie pick third, then, other things being equal, Alan will pick items 1, 4, 7 and 10, worth $12, $9, $6 and $3, for a total of $30. Barbara will pick items 2, 5, 8 and 11, worth $11, $8, $5 and $2, for a total of $26. Charlie will pick items 3, 6, 9 and 12, worth $10, $7, $4 and $1, for a total of $22. This method isn’t particularly even-handed.
By contrast, suppose selection goes oldest to youngest in Round 1, youngest to oldest in Round 2, oldest to youngest in Round 3 and so forth, flipping the order back and forth. Other things being equal, Alan will pick items 1, 6, 7 and 12, worth $12, $7, $6 and $1, for a total of $26. Barbara will pick items 2, 5, 8, and 11, worth $11, $8, $5 and $2, for a total of $26. Charlie will pick items 3, 4, 9 and 10, worth $10, $9, $4 and $3, for a total of $26. Each heir will receive equal value because the rotation system doesn’t always favor the eldest heir.
However, moving from theory to practice limits the empirical value of this example, because real-world collections seldom exhibit perfectly linear declines in value. Consider a collector with a showpiece: Item 1 is worth $25 and the other 11 items are valued as above. If Alan (the eldest heir) consistently picks first, we have Alan = $43, Barbara = $26 and Charlie = $22. If we flip who goes first each round, we have Alan = $39, Barbara = $26, Charlie = $26, which moves toward evenhandedness but is still significantly affected by the showpiece. In such a case, one might consider auctioning the showpiece among the heirs and using a rotation system for the rest of the collection.
There’s no magic bullet. Rather, the many options available need to be lined up against the particular collection, the collector, his fiduciary and his heirs to craft a personalized solution.
Preserve the Papers
When a collector concludes that his heirs are best served if his collection is sold after death, we must address different, but no less meaningful, questions. Losing the benefit of the client’s knowledge when he passes needn’t mean that the sale of his bangles will be bungled.
By nature, passion assets aren’t necessities; they’re luxury goods. As a collector prepares his assets for sale, it’s useful to consider how the assets will deliver luxury experiences to their buyers. Preserving and organizing relevant papers and packaging can increase sale value while capitalizing on the collector’s knowledge even after his death.
A seasoned collector may never consult an item’s instruction manual, but delivery of the original manual, with period graphics and feel, adds value that forcing a less experienced buyer to print out a PDF file doesn’t. Similarly, even though a veteran collector may view the trend toward elaborate presentation boxes to be more a nuisance than a positive thing when his closets begin to bulge, the ability to deliver original packaging with an item will promote the sense that it’s been well cared for and is being delivered “like new.” Such attention will almost always increase value.
Of course, “like new” and “new” are two different things. If the passion assets at issue typically require service, like watches or photographic equipment, the ability to provide service records is important in the same way that it’s important when selling a used car. Is the service history consistent with proper maintenance of the items? Or, is it so frequent as to suggest that the piece is a lemon? Was the piece restored to an extent that collectors find distasteful? Was it serviced by someone with resonance in the field or by someone who probably has never laid hands on so fine an object before or since? Was it last serviced recently enough to suggest that it’s in good working order currently? A buyer won’t merely discount his best price by the contemplated cost of repair, but also by a factor that reflects the wait he anticipates while his purchase is off in some remote workroom being made healthy again.
If the client carefully manages papers and associated materials during life, he can help his executor come close to realizing maximum value without needing to possess specialist expertise.
Finding a Way Out of Here
At this point, the collection is all dressed up, but it still has no place to go. Different sale venues offer different opportunities to maximize value for the heirs.
Private sales are always a possibility, particularly if the decedent was well known and well liked in the collecting community. Such sales minimize the need to educate a pool of buyers about what’s on offer and can proceed quickly, informally and commission-free. However, they also require that a fiduciary be able to deal commercially with items that the deceased loved and acquaintances who won’t let self-interest get the better of them if the fiduciary isn’t an expert. These risks are exacerbated, and security issues are added to the mix, as the circle of potentially interested private buyers is allowed to expand beyond individuals whom the deceased actually knew.
The fiduciary should also consider resale or consignment to the dealers that the decedent dealt with during life. At the cost of a consignment fee or the wholesale/retail spread, the dealer serves as a middleman: Friends of the deceased likely will enjoy easy and speedy opportunities to buy, unencumbered by the rigidity of an auction calendar, while the collection can also be offered to customers who were strangers, because of the breadth of the dealer’s customer lists and the security of his premises. A helpful element of self-selection is also in play: If the decedent’s tastes led him to use a particular dealer, the dealer’s other customers are that much more likely to be interested in what comes back to the dealer’s stock from the estate.
There remain occasions when a formal auction setting is the right way to go. The client’s collection may be substantial or notable enough to benefit from the publicity offered by a major auction, even at the cost of an increased seller’s premium and the need to wait until a suitable date comes up on the auction calendar. There may be specialist auctions on the calendar that will attract a volume of niche buyers with focused interest in the client’s collection that no single dealer can command. Less pleasantly, a frank assessment of the decedent’s relations with dealers and the collecting community during life, or the estate’s simple desire for privacy, may make an impersonal method of disposition more appealing. Here, much can be hidden behind the simple catalogue phrase: “From the Collection of a Gentleman.”
Nor is it incumbent on the fiduciary to choose only one venue to dispose of the entirety of a collection. For instance, friends may be interested in specific pieces to remember the deceased by, and a certain number of lots may be of sufficiently superior quality to demand the auction block, while the broad middle of the collection may best be sold through dealers who knew the deceased and are able to identify existing customers with similar interests.
The Final Gavel
Certainly, there are a lot of moving parts. But, the time will come when the client has gone to his last auction, and your estate paralegal, dropping a massive old box on the conference room table, will pull out something amazing and remark, “It’s heavy. What is it?” Have the courage to look him in the eye and reply, “The, uh, stuff that [estate plans] are made of.”3
1. For instance, a 1909-1911 T206 Honus Wagner baseball card (which this article’s headline refers to) sold for $2.1 million in an online auction conducted by Goldin Auctions on April 6, 2013.
2. Internal Revenue Code Section 1014.
3. Adapted from Sam Spade’s original line in “The Maltese Falcon” (Warner Bros. 1941): “The, uh, stuff that dreams are made of.”