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Art Planning, For Everyone's Sake

One would think a client's collection of 50 cars, let alone 50 Corvettes, would be hard for a team of financial advisors and estate planners to ignore.

One Would Think a client's collection of 50 cars, let alone 50 Corvettes, would be hard for a team of financial advisors and estate planners to ignore. But according to a story relayed by Michael Mendelsohn, founder of Briddge Art Strategies, an art-succession consulting firm, that's exactly what happened to one particular client, who will remain anonymous. The client had amassed such an impressive collection of one of America's iconic sports cars — one for every year from 1955 to 2005 — that it was worthy of its own show. But his advisors didn't consider planning for the collection until it was much too late.

Long after they had set up an estate plan, the client decided his collection should, in fact, be on display. And so he called a joint meeting with Mendelsohn and his financial advisors. They decided to set up a private museum to house and preserve his Corvette legacy. Proceeds would benefit the client's favorite charity, the Ronald McDonald House. The advisors hastily engineered a deal whereby the client would take a loan against the car collection, and use it to purchase a life-insurance policy for himself and his wife. Upon their deaths, part of the policy would be used to fund the museum, whose profits would go to the charity, and the rest would provide income for the kids.

Sadly, the plan never came to fruition. Only months before it was to be completed, the client died of a rare disease. The Corvette collection was left instead to his spouse and children. With no plans for the cars' succession, and nine months to pay 45 percent of the value of the cars in estate taxes, the widow and children began auctioning off the cars and arguing over who would get what.

Obviously, that's not the ending any of the people involved would have wished — least of all the client. And it could have been prevented with proper planning, a process that starts with a simple conversation, says Mendelsohn, who is also an avid collector of folk art and author of Life is Short, Art is Long, a succession-planning guide. “Finding out if a client collects is imperative. That will lead to what and so on,” Mendelsohn says. “But it's incumbent upon the advisor that these assets be thoroughly discussed.”


You may have heard that the contemporary art market is booming. Christie's and Sotheby's reported record-breaking sales in the first half of 2007. The auction houses reported $3.25 billion each, up almost 50 percent versus a year ago. Meanwhile, works by well-known artists have been setting record prices. Never mind that some experts are predicting that the 17-year bull market in art is about to bust. Conservative estimates by art dealers, auction houses and major trust companies peg the value of art and collectibles in private hands in the U.S. somewhere in the range of $4 trillion to $6 trillion — equal to roughly one-third of total mutual-fund-industry assets.

It's not all Picassos and Warhols, of course — maybe your client collects Nigerian tribal figurines or Civil War firearms. Or maybe she collects stamps. Take PIMCO legend Bill Gross, who inherited a stamp collection from his mother and then became an avid collector himself, expanding the collection so rigorously that just a tiny portion of it (some rare British stamps) sold this summer for $9.1 million. Whatever the knickknack, chances are at least one of your clients — regardless of wealth — is a collector of some kind.

Do you know what that collection is? What it's worth? What the client is planning to do with it? You should, especially if the client is in his twilight years. Here's something to keep in mind: Over the next 50 years many trillions — $41 trillion according to a Boston College study — will be transferred from baby boomers to their heirs. Even if you think those numbers are suspect, the point is that a lot of people (your clients) will be passing a lot of assets to a lot of other people (likely, their heirs or charity). And a chunk of that will undoubtedly include some valuable collections of “touchable” assets. While taxes and the preservation of liquid assets are key concerns, what's at stake for everyone involved is far greater than that, as the case of the Corvette collector illustrates. He lost a legacy, the charity lost a donor, taxes hammered the heirs and it all could have been prevented. Had the advisors planned ahead and used any number of estate-planning tools, they could have maintained control of the assets and probably solidified their relationship with the next generation. Don't let that kind of mistake happen to your clients or your business.

Tom James is a well-prepared collector. He has no intention of bungling the transfer of his rather sizeable collection of art. The 64-year old CEO of Raymond James has one of the largest collections of Western American art in the world, with roughly 1,850 pieces. Most of the works adorn the walls or occupy the grounds of his firm's headquarters in St. Petersberg, Fla. He is currently planning for the construction of a museum to house 400 or so of his favorite pieces from his collection. In the meantime, if something were to happen to James and/or his wife, the James' family foundation owns the collection, so its not part of his estate. James admits that even he — an experienced financial planner and art collector — finds the process of planning for its succession “very complicated.” While an advisor wouldn't likely miss a collection like James' in the estate-planning process, he says Raymond James advisors are taught to be diligent with every client, collecting inventory of every (liquid and illiquid) asset and updating that inventory regularly. The reason is simple: “If the client dies unexpectedly, most spouses and heirs don't have a clue where all the assets are,” says James.

Advisors must learn to ask clients about touchable assets because some clients will regard these as keepsakes rather than part of their estates and fail to mention them. Mendelsohn recommends advisors expand the typical client questionnaire to include the following: the names and types of any collectible holdings, their cost basis, current market valuations and the intended beneficiaries (charity or family).

If your clients can't answer any of those questions, you've got work to do. Once you know what they collect, finding out what it's worth is a matter of finding a reputable appraiser. Try consulting one of the following groups: the American Society of Appraisers, the International Society of Appraisers or the Art Dealers Association of America. (For more on the importance of a quality appraisal, see above.) Once the actual discussion of planning for the collectibles begins, keep it simple, says Doug Moore, head of estate and charitable planning at Citi Trust. Moore says he recommends advisors ask clients four questions: To whom (or what institution) will the collectible be given? Will it be sold, given to charity or given to heirs? What will be given? The whole collection, or a piece? When will it be given? During life or at death? How will it be given? Outright, in a trust, or through a foundation?

Of course, none of these questions should be answered without a family discussion. Some children — and even the collector himself — may be indifferent to all or parts of it; others may have strong feelings about certain pieces. Regardless, communication among family members early in the owner's life can prevent a disaster later.


The death of a loved one is bad enough, but planning after death compounds the unpleasantness. Heirs can be left with an estate-tax bill they can't afford, and either be forced to sell liquid assets (like their brokerage accounts) or the collection itself to pay the tax man. The IRS says estates have nine months to file the estate-tax return; without a plan, the collection is often hastily sold at auction. If it is art and it sells — and 35 percent of collectibles do not, on average — the capital gains tax on art is a hefty 28 percent of the cost basis. For a highly appreciated and valuable piece of art, this transaction could yield a very large bill indeed. Add to that state and city income tax in a place like New York (10 percent or so, combined), where a lot of art is sold, in addition to auction fees, and it is easy to see why beneficiaries of the collection stand to lose 70 to 75 percent or more of the collection's value, says Mendelsohn. Again, failure to plan ahead is a lose-lose situation for everyone involved — including the advisor.

Charitable remainder trusts are valuable tools to use when you are planning for art and other collectibles. They can provide income and tax breaks while preserving a collection (or certain pieces) through a charity. And if a client wants all those things but also wants to leave money to heirs, the advisor can add a life-insurance component. Steven Rosenberg, a Florida-based CFP with Raymond James Financial Services, says he currently manages the investments of five charitable remainder trusts (CRT), four of which are made up of highly appreciated stock. The fifth holds a multi-million dollar art collection for a client who did not initially know that his art would be considered part of his estate. “Charitable remainder trusts work well with any highly appreciated asset,” says Rosenberg.

The CRT allows clients to take a charitable income-tax deduction, receive income for life and leave a charitable legacy, as well as remove the asset from the estate. But by adding in an irrevocable life insurance trust (ILIT), the heirs get an inheritance roughly equal to the value of the art being donated. Here's how it works: The ILIT purchases a life-insurance policy for the client equal to the value of the trust, naming the children as the beneficiaries. This can be done either with a loan against the collection, or with the estate- and income-tax savings from the charitable tax deduction. Upon the collector's death, his spouse or kids get the assets estate- and income-tax free, and they can also use the money to pay the rest of the estate-tax bill. Everyone's happy, including the advisor, who has saved the heirs from a brutal tax bill that may have set off a fire sale in the collectibles and other assets, and who gets a commission for the sale of the life-insurance policy. And, if he was clever in the planning process, he will also end up managing the investments in the trust.

Of course, there is no single solution that fits all. Kim Wright Violich, president of Schwab Charitable, the division of Charles Schwab that helps advisors and clients plan for charitable giving, says donor-advised funds can be useful for those who don't need extra income for themselves or their heirs. She tells the story of one client with a highly appreciated painting: He paid $60,000 for it, but over his lifetime the value of the painting soared to $450,000. The client had no attachment to the painting, and didn't need any income from it; he just wanted it out of his estate. His initial thought was to sell it, but that that would have incurred the dreaded 28-percent capital gains tax. What's more, he was a resident of New York City, so the additional income taxes jacked that bill up to 38 percent of the sale price. Violich and his advisor convinced him to use a donor advised fund (DAF). The title of the art was transferred to a charity, which gave a grant to the client's charitable account — an account the advisor then managed. The client got a charitable tax deduction on the fair market value of the painting, and was able to change his selected charities at any time. He also avoided the capital gains- and income-tax hammer.

These are just a few of dozens of tools and strategies available to advisors and their clients. Expertise isn't the issue, says Violich — experts in estate planning for illiquid assets like art and collectibles can be found pretty easily. But if the discussion between advisor and client happens too late, that won't matter.

“Some people care about their art portfolios like they do a child; their concern is with the integrity of the portfolio, not the tax ramifications,” says Mike Delgass, a principal with Sontag Advisory in Westport, Conn. “They don't want to sell, and they don't want heirs to have it because they might sell it. So they avoid the process of planning for it after they die,” he says. Don't let your clients fall into that trap.


In determining the value of a collectible, an appraiser evaluates the condition, authenticity and possible market for the object, as well as its provenance — the ownership history. This is particularly important. After World War II, private collections across Europe were pillaged. From time to time, these “stolen” objects turn up in museums or other private collections. Then there's the black market in stolen art, which according to Interpol and UNESCO, grosses $6 billion a year. Oftentimes the owners of such works won't even know they are stolen. Take Steven Spielberg: In March it was brought to his attention that a Norman Rockwell painting he owned, titled “Russian Schoolroom” — valued at $700,000 — was actually “hot” (it had been stolen in 1973). He bought it in 1989 from a legitimate art dealer in what was thought to be a legal transaction.

Unfortunately, some art owners intentionally keep the provenance of a work a mystery. It's a risky method of “planning” that many wealthy families use to keep collections under the radar of the IRS. There's no mention of the works in the estate or will, no insurance — no records are kept at all. Mendelsohn calls this the “empty hook” strategy: At death, a child's name is written under the empty hook on the wall where a painting once hung. “This usually works until the art makes it to the great-grandson,” he says, at which point divorce, debt, or a mere disconnect with the legacy of the art and its original owner may cause the heir to sell it. The result? The heir gets hit not only with capital gains and estate taxes, but penalties for fraud, since there's no statute of limitations on estate-tax fraud.

The accuracy of an appraisal is key, because the IRS can ding you heavily if it turns out you were wrong. If your collection or art work is given an appraisal value over $50,000, the IRS assigns a special committee of art experts to your file, says Chris Shorba, an estate-planning specialist and partner with Kern DeWenter Viere Ltd. in St. Cloud, Minn. For all returns filed after June 17, 2006, the penalty is 20 percent of your tax liability for a substantial understatement of the work's valuation, and 40 percent if there is a gross understatement of valuation, he says. (Substantial applies when the value claimed represents 65 percent or less of true value. Gross applies if the appraisal value is 40 percent or less of the true value.) Other penalties and fees may follow, he says. Shorba says stiff penalties accompany overstatements as well, a common temptation for those seeking a tax deduction on a donation of art or collectibles to charity.

So it's a good idea to ask the IRS to give you a statement of value. Typically, the agency will respond within six months to a year. It'll cost your client $2,500, but it's a cost far outweighed by the benefits if the client owns something valuable, says Mendelsohn.

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