There are essentially two main options for transferring a valued collection—either passing it along to family or donating it to charity—each with its own estate planning implications. When planning to transition a collection, value is about more than just dollar value; it’s also about the personal value to the owner and what it may mean to his family or to a charity. In a prior article, I discussed transfers to families. In this article, I’ll focus on transfers to a charity.
While the owner may have a specific charity in mind that he believes would be the perfect recipient for the collection, it may not be the most suitable choice. And, if the right fit is found, the charity may require an endowment fund to maintain the collection. Just as in donating the collection to family members, there are several factors to consider when deciding to pass it on to a charity.
Selecting the Right Charity
A key consideration is finding a charity that’s willing to take the collection, which can be an increasing problem. The owner may want a charity to take the whole collection, but the charity may only be interested in a few items, because of the storage costs and available exhibit space, and it may be concerned about its ability to sell parts of the collection at a future time, due to concerns in the art world about “de-accessioning.”
Gift During Life?
Many of the same considerations about the timing of the gift apply to gifts to charity as well as to gifts to family. First and foremost, of course, the question is whether the owner is willing to part with some or all of the collection during life. But unlike lifetime family gifts, there are important income tax benefits to donating some or all of the collection during lifetime.
Income Tax Considerations
When an owner makes a lifetime donation that’s properly structured, not only will it reduce the taxable estate, but also, the owner can take advantage of a federal income tax deduction and, in some states, a state income tax deduction. The amount of the charitable contribution deduction will depend on a variety of factors: the kind of asset given, the type of charitable donee, any other donations made during the same tax year and the owner’s adjusted gross income (AGI) for the year of the gift. Gifts of appreciated tangible personal property held more than a year and donated to a public charity generally are deductible in the year of the gift to the extent of up to 30 percent of the donor’s AGI, and the unused deduction can be carried forward for the next five years, subject to the 30 percent limit. In addition, when making a gift of tangible personal property, it’s important to keep in mind that for the donor to receive a full fair market value (FMV) deduction for income tax purposes, the charity must use the donated property for its charitable purposes. So a yacht given to a nonprofit sailing school is fully deductible, but if that same yacht is given to a land-locked college, it will be hard pressed to put the yacht to use. If the charity sells the property within three years of the gift, the deduction may be limited to basis if the donee can’t certify that it used the property for its charitable purposes or became unable to do so. Detailed rules apply to gifts of tangible personal property, particularly when making a fractional gift of just part of the property. Failure to follow all of the rules can result in a loss of the deduction and penalties can also apply.
Because the FMV deduction is limited to tangible property donated to a public charity that uses the property for its charitable purposes, donating a collection to a private foundation during life generally isn’t tax efficient.
The owner will need to get the collection appraised to justify the charitable deduction and must obtain a written acknowledgment of the donation from the charity. Technical rules apply to these requirements: a donor can lose the deduction if the charity hasn’t sent a timely acknowledgement, and the deduction can be reduced if the appraisal doesn’t hold up on audit.
Importance of Gift Agreement
It’s important to take the time to draft a gift agreement specifying how the charity will use or display the collection. The agreement should also cover what will happen if the charity can no longer use it for the purposes specified or if the charity ceases to exist. Although a gift agreement can be somewhat expensive and time-consuming, it’s invaluable in ensuring that the owner and the charity agree on the terms of the gift.
Passing it on After Death
The big question is whether the owner wants to keep the collection intact. Even if he plans to give the assets at death, it’s important to have a conversation with the charity in advance, so that it’s clear if it will be willing and able to accept the gift. While the related use rules don’t apply to gifts at death, a charity might still decline the gift, if it isn’t a good fit for the charity. The same topics covered in a gift agreement should be included in a testamentary gift, whether by will or trust. For very large collections, a donor can even consider creating his own museum, which would be a very big undertaking. And of course, it’s important to communicate with the family about any plans for the collection, even if it doesn’t include them. Avoiding a surprise at the owner’s death can save a great deal of unhappiness and possibly litigation against the charity.
Communication and planning are essential when a collector plans to donate a collection. Understanding the detailed income tax rules that govern the gift, and selecting the right charity to receive it, will help the collection survive for others to enjoy. Communication to the family of any charitable plans is equally important; without communication a large charitable gift may lead to family upset and, at worst, expensive and distressing litigation pitting the family against the charity. With upfront planning, a collection can survive as a collector’s legacy and a valuable gift to the community.
Carol Kroch is managing director, wealth and philanthropic planning, Wilmington Trust Company.
This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. It is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.