Like many other business sectors, the art market has been heavily disrupted by the worldwide impact of the Covid-19 virus, and collectors can expect market shifts to persist for some time. In these turbulent times, here are some tips for collectors to keep in mind to safeguard their art property, as well as information on tax relief legislation designed to encourage collectors to make cash donations to charitable institutions.
Disruptions in Sales Channels
Many spring auction sales have been postponed, art fairs have been either postponed or cancelled and galleries and auction houses have had to close their doors to the public under government mandates. This physical distancing has resulted in challenges to a collector’s ability to physically inspect and transport works. Various art merchants have either launched or expanded their online viewing platforms to foster continued engagement with the art community. While works have been available through various online channels for years, the scale of the online engagement efforts has significantly increased in recent days. Whether these online efforts will continue at this scale after galleries’ physical locations reopen to the public remains to be seen. Regardless, collectors acquiring works viewed only online should review the relevant terms of sale prior to effectuating a sale to confirm that the collector has received sufficient information concerning the current condition of the work and/or that the art merchant is contractually bound to deliver the work in good condition and should inquire about the method and timeframe of delivery to the collector’s physical address or storage location.
Consignments to Dealers
In past recessions, the art market has seen a number of gallery closures and bankruptcies. Some have predicted that the Covid-19 pandemic likely will eventually result in the closure and bankruptcy of many galleries.
Collectors aiming to consign works to galleries should be mindful that merely having a written consignment agreement with the gallery may not be enough to ensure that the collector’s rights to her artwork don’t become subordinate to the rights of the gallery’s creditors. Savvy collectors should consult with an attorney prior to the delivery of significant artworks to an art merchant concerning the filing of UCC-1 financing statements in the relevant jurisdictions with respect to their artwork and conducting a lien search on the intended consignee. (A UCC-1 financing statement is a document designating an individual or entity’s security interest in the property of another, which is publicly filed and recorded with the Department of State in accordance with Article 9 of the Uniform Commercial Code.) Fortunately, numerous states, including New York, have enacted laws automatically protecting consignments from artists to art merchants, so that an artist doesn’t need to file any UCC-1 financing statement to protect her art assets from a gallery’s creditors.
Cybersecurity
Cybercrime has ramped up during the Covid-19 pandemic. While participants in the art market (like every other market) have fallen victim to hackers before this pandemic, collectors should be particularly vigilant during this crisis. In addition to adopting cyber liability loss prevention measures, collectors should be mindful that sometimes losses can be avoided simply through an email recipient double checking the email address of the sender to confirm it’s correct and avoiding suspicious web links contained in emails. Further, as payments for art purchases are often made via wire transfer, collectors should call the seller to confirm that any wire-transfer instructions sent electronically are accurate and haven’t been intercepted and manipulated by a hacker.
Art Loans to Museums
Numerous museums across the globe have closed their doors to the public indefinitely. While the timeframe within which they’ll eventually reopen will be decided on a case-by-case basis, the schedule of current and upcoming exhibitions at these institutions is up in the air. If a collector’s artwork already is on loan at a museum, the collector should review the relevant loan agreement and communicate with the borrowing institution to confirm that the loan agreement and insurance coverage provided by the borrowing institution will apply during the time period in which the artwork remains with the museum, even if such timeframe extends beyond the initially-anticipated term of the loan. Collectors should also consider inquiring about the staffing and security controls at the museum during the period of closure to ensure their artwork is protected against theft.
Cash Donations to Charitable Institutions
The Coronavirus Aid, Relief, and Economic Security (CARES) Act contains a tax relief provision intended to soften the economic impact of the Covid-19 pandemic on charitable organizations by encouraging contributions of cash to charitable institutions. For 2020, the CARES Act allows individuals who claim the standard deduction (that is, don’t itemize their deductions) to deduct up to $300 of qualified charitable contributions of cash. Sections 2204-05 of the CARES Act also relaxes the percentage limitations that apply to individual (as well as corporate) cash charitable contributions in 2020.
Amelia Brankov is counsel to the firm of Frankfurt Kurnit Klein & Selz PC, in New York City.