Antiques Road Show attracts crowds of people eager to have their art, jewelry, furnishings and collectibles appraised. The show’s allure lies in the thrill of discovering that inherited item worth a fortune or the heartbreak of realizing a cherished heirloom is worthless. Your clients’ children will experience these same emotions when they inherit the clients’ collection. Excited yet anxious, the children hope for a valuable inheritance but also feel conflicted about selling anything, unsure of what to do next. Here is some guidance you can give to your clients’ children to help them navigate the complexities of managing a collection.
We specialize in assisting collectors and their families, and we have encountered similar situations with our clients. One client inherited a collection of Americana from his uncle, which included several exquisite pieces of furniture. Surprisingly, the most valuable item turned out to be a greenish pot that had always sat atop the family refrigerator, surpassing the appraised value of the rest of the collection at auction. As a result, the client sold the pot for more than double the worth of the entire collection, allowing us to preserve the remaining pieces within the family.
Another client inherited his father’s coin collection. While most coins held only face or metallic value, there were eleven exceptional coins that far surpassed the rest in worth. Having been informed by their father about the collection’s "best" pieces, they took great care in preserving those coins while selling the others.
When a client’s children inherit a collection, a significant portion of their net worth becomes tied to it. Over time, the collection’s value may increase, representing a substantial percentage of their wealth—up to 10% in the U.S. and 20% globally. Balancing the children’s existing investment, legal, financial and insurance planning with the specialized management required for the collection becomes crucial.
One of the primary concerns my clients have is that their children may not fully appreciate the true value of the collectibles they inherit. Unlike stocks, bonds or real estate, it’s not always easy to find the worth of these items on the internet. To help your clients’ children adjust to owning a collection, there are three essential steps to follow: 1) inventorying the collection, 2) aggregating the assets, and 3) establishing a management plan.
Step One: Inventory
Many collectors do not have an up-to-date inventory of their assets. For those collectors who do have an inventory, it often lacks critical information or is presented in a confusing manner. Estate inventories tend to focus on minimizing the estate tax value and may not be comprehensive or adequately detailed. Additionally, descriptions of items like photographs can vary from one place to another, making it difficult for inheritors to understand their origins, authenticity and place within the collection. As the expert of the collection, the client’s first step in informing their children is to create a comprehensive inventory.
The format of the inventory doesn’t matter as long as it exists. It can be a spreadsheet, index cards, or a notebook. At a minimum, the inventory should include:
- A list of photographs of the items in the collection, with details such as photographer, subject, location or any other relevant criteria.
- Information about publications where an image of the item is reproduced, including auction catalogs, exhibits catalogs and artists descriptions.
- Dates of creation and acquisition.
- Documentation such as licenses, assignments, copyrights and so on.
- The physical location of each item.
- Names of galleries or dealers along with their contact information.
- Any paperwork associated with the item, such as bills of sale.
Include any references to contractual relationships that may exist, such as consignment agreements, copyrights, distributions and reproduction rights, if your client has allowed their photographs to be reproduced in books or publications. It’s important to note that owning a photograph does not automatically grant copyright ownership, and artists in some countries retain certain rights over the transfer and display of art even after its sale.
Step Two: Aggregation
As your client takes stock of their collection, they’ll realize the sheer volume of items they own. It’s not just valuable items that are easily recognizable, but also the associated mass of documents, catalogs, notes, letters, bills of sale, articles and paperwork. Each piece of paper can be crucial in determining the provenance and value of an item. It’s important for inheritors to understand the significance of these items, each with its own unique tax, provenance and valuation considerations. Simplification is key to achieving this.
The first step towards simplification is to aggregate photographs and their accompanying paperwork. Group similar items together and establish rules or guidelines based on trends in taxes, recognition, liquidity premiums and personal preferences.
The values of certain items in a collection are more susceptible to market forces than others. This could be due to prevailing taste, critical acclaim, provenance and authenticity challenges, cultural significance or changes in laws governing the sale or purchase of certain items. It's necessary to aggregate the collection based on items with stable pricing and those with more volatile pricing, questionable legality or uncertainty surrounding legal ownership. Legal ownership (also known as provenance) of artwork and collectibles is crucial for the inheritor’s ability to either retain the collection or obtain a fair market value when selling it. The antiques and collectibles market is unregulated and complex for newcomers, and without guidance, they may be taken advantage of.
Liquidity: The ease with which inheritors can sell an item also plays a role in aggregation. Merely being rare or unique may not guarantee liquidity; there must also be demand from buyers willing to pay for ownership and control of the item. A highly sought-after item can be sold quickly, even if it’s in poor condition, while a well-preserved and flawless item, albeit less well-known, may languish on the market for months or even years. In many cases, children will inherit a few highly liquid items alongside many illiquid ones in the collection. By aggregating the best, highly liquid items you can negotiate fees, commissions and other costs associated with the sale.
Premium: Your client’s children will inherit items that others can only dream of owning unless they are willing to compete with the wealthiest collectors and institutions at auctions. These premium items can be crucial for preserving the rest of the collection, especially if you have made prior arrangements to mitigate estate taxes during estate settlement. These exceptional items exist in a league of their own; and, you should guide your client’s children toward expert assistance in managing their preservation, transfer or sale. It’s crucial to find trustworthy experts whom they can rely on.
Step Three: The Management of the Collection
Your client has played an active role in buying and selling images and other collectibles. Now, it’s time to manage their collections. As part of this management, you will need to find professionals with the necessary expertise and experience to carry on managing the collection, ensuring its preservation even after your passing. Let’s start by asking your client the following questions:
- Do your children understand the discipline of buying and selling within your collection? Some images may rapidly decline in value after purchase, while others that were initially out of fashion may increase in value, but only temporarily. Your children need to develop a similar discipline in managing the collection. They should know when to hold assets until their value recovers; when to sell to limit losses; and, when to sell some or all of the collection before the market declines. Reviewing the collection with a critical and unbiased eye is crucial, and your children need guidance in understanding when to sell and how to enhance the collection.
- Does the personal representative of your clients know how to maintain and ultimately dispose of any collectibles in your estate? In some cases, a cultural executor such as a private curator, or an expert in the field, may be better equipped than family members to handle the disposition of artwork. It’s important to allocate additional funds for administrative costs in such circumstances.
- Do your insurance policies or funds from the estate provide support in alleviating the burden of additional administrative and tax costs for the collection? Life insurance should be held in a specified Irrevocable Life Insurance Trust designed to provide liquidity to the collection. It should be drafted to allow investments in and loans collateralized by items. Consider not only property and casualty insurance but also title insurance for items of significant value. This helps manage transaction risk and eliminates liability for clients when selling works.
- Have you kept records of your purchases and sales? Ensure that the names of galleries, dealers, auction houses, or other potential buyers or sellers of your collection are easily accessible to your children in case something happens to you. Provenance has become increasingly important, particularly for items coming out of Europe before and after WWII, as well as art originating from countries facing economic and political turmoil, such as Russia in the 1990s or Syria today. Provenance will continue to play a significant role in the valuation of items.
- Have you specifically addressed the disposition of any copyrights you may own in your will? It is unlikely that your children will inherit copyrights, but if you have published images, there may be rights associated with them. Keep in mind that copyrights can be created for images of objects that would otherwise be in the public domain. Additionally, if you plan to donate a specific item to a charity during your lifetime or after your death, remember that the donation does not automatically include the copyrights to the object unless explicitly stated. However, if you gift the same object to an individual beneficiary, the copyrights will be transferred as well. Ensure that your personal representative can locate records of the copyrights, as by law, copyright transfers must be in writing and signed by the copyright owner. Depending on the circumstances, the transfer may also need to be recorded with the US Copyright Office.
- Do you have any specific instructions or restrictions regarding how items may be used or licensed? We all have emotional attachments to our collections, and your children may feel a moral obligation to preserve certain restrictions, such as not selling the items or commissioning new books in the same series. Addressing these restrictions will require significant cooperation with your children and other owners of the images, so it is crucial to clearly and precisely draft these restrictions.
- Have you made arrangements for the maintenance and storage of the collection within the estate? It is important to estimate the total cost of the planned disposition of your collection, equipment, and supplies (including storage, distribution, and conservation) upon your death, even if only in broad terms. For example, shipping a grand piano across the globe may exceed the piano’s value, and the beneficiary may require financial assistance to cover the associated costs. Additionally, when placing images or other items in long-term storage, there is a risk of damage or loss if the storage facility experiences a catastrophe. Proper storage is particularly crucial for photographs, film, and digital files.
- Have you considered the use of split-interest trusts and charitable foundations as effective tools for managing art? A trust, LLC, or Family Limited Partnership can be ideal for managing a collection and its associated copyrights, licensing, and management costs when it is shared among multiple beneficiaries. Alongside a management trust, it is beneficial for your client to be familiar with the use of split-interest trusts (such as CRT, CLT, GRIT, GRAT) for transferring collections between generations.