An interesting situation
arose recently with a colleague of mine.
Acting as the executor of a
longtime client’s estate, she discovered an original statue of a famous 19th
century artist in the recently deceased client’s closet. If no pre-emptive
planning was done, this statue could pose several potential issues for the
estate and their heirs.
While we may not find
artwork of this caliber stashed in the closet of a relative, we or our family
members may be collectors of art and other valuable items that we consider not
just as personal property that reflects our passions, but also as a means of
building our net worth.
In fact, in a 2017 report,
Deloitte found more than 80 percent of collectors reported they thought of
their art collections as a type of investment.
Why then do many
high-net-worth collectors fail to adequately plan for the ultimate distribution
of these potentially valuable assets?
If you own valuable artwork,
antiques or other collectibles, then you may want to consider how to correctly
distribute these assets upon your death.
To help you and your heirs
plan for these treasures when you are gone, we have touched on a few important
topics to consider.
What is a collectible?
According to the IRS, the
definition of collectibles includes works of art, rugs, antiques, any metal or
gem (with exceptions), any stamp or coin (with exceptions), valuable alcoholic
beverages or “any other tangible personal property that the IRS determines is a
“collectible” under IRC Section 408(m)”.
In general, there are two
ways you can distribute collectible personal property — either leave the assets
to your heirs or donate them to a charitable organization.
In either case, special tax
and estate laws will apply and these laws differ from laws governing
distribution of other types of assets in an estate. Ignoring these laws can
result in unnecessarily high capital gains taxes to your heirs, income or
estate tax penalties, or depreciation of the asset’s market value.
Equally troubling are issues
that may arise from ownership disputes or difficulty in liquidating rare items,
assets with limited market demand or collectibles where their worth is derived
primarily from family sentimental value.
For now, we will address
special considerations for distributing collectible personal property to your
friends or family members.
Why is proper valuation important?
Many estate plans clearly
articulate a plan for division of financial assets but fail to address
distribution of more complicated assets that often have both financial and
sentimental value. Jewelry, large coin or stamp collections and rare antiques
are just a few examples of assets that can complicate an otherwise orderly
distribution of someone’s estate.
In many families, members
often have different opinions about fair market value for collectible assets
left behind. These differences can lead to delays in the settlement of an
estate which could be costly, fuel disagreement among heirs, or even lead to
One way to reduce the chance
of this occurring is to obtain appraisals for all valuable collectibles while
you are still living.
Some attorneys and CPAs also
suggest in your estate planning documents you include the names of at least two
dealers and one or two auction houses who specialize in your type of
collectible. This information can be helpful to whoever settles your estate,
especially if they are not an expert in things like wine or antique
Markets and the economy
certainly influence a collection’s ultimate value. It’s best to get estimates
from multiple sources with dates and valuation amounts to help your executor
and heirs have a sense of a reasonable range of values for the collection
should they decide to sell the assets.
By providing clear
documentation of the potential value of your precious belongings in your estate
documents, you reduce the chance that something having great value will be sold
at a deep discount by a naive heir or donated away to charity by an unaware
Proper valuation is also
important to help establish how much should be included in the calculation of
the overall value of your estate.
Delays can occur if someone
must take extra time to find the right experts rather than simply contacting
the experts you provided for your type of asset. Since there are no licensing
requirements for appraisers of personal tangible assets, whoever selects the
appraiser will need to carefully consider their credentials or level of
expertise in a particular area.
Remember that even if your
heirs choose to hold the assets rather than sell them, they will still need a
value of all assets to establish the total value of your estate.
Tax laws also stipulate that
if assets are not sold within a period of time of the owner’s death, or if
values exceed a certain level, the estate must obtain an official appraisal for
valuation purposes. Some estates try to avoid this requirement by donating
assets directly to a charity, but this is technically not allowed unless the
estate plan specifically authorizes such assets to be donated rather than
passed on to estate beneficiaries. And failing to report some valuation for tangible
personal property on the estate’s Schedule F (Form 706) is a leading audit
trigger for the IRS.
Note that valuation for
insurance purposes is not the same as valuation for estate planning and legacy
Insurance appraisals and
valuations for determining coverage are meant to reflect replacement or retail
value of collectible assets and typically result in the highest appraised
value, which often differs substantially from fair market value.
If you think valuation for
insurance purposes may cause confusion about the value of assets if you pass
away, you’ll want to leave special instructions so that heirs don’t assume
insurance schedules are accurate as to correct valuation.
Related, an absence of
insurance could imply lack of total fair market value to an uneducated estate
How are collectibles taxed?
Reliable valuation from
expert appraisers is also necessary to satisfy income and estate tax laws.
An appraisal done as of the
date of death provides an accurate tax basis that the beneficiary takes on as
their own basis when the asset is passed to them. This is an important figure
as it ultimately determines the taxable gain and amount of income tax
inheritors will pay if they hold any of the assets for a period of time then
sell them at a later date.
This special tax law, known
as “stepped-up basis”, may provide some incentive for you to keep highly
appreciated assets until you die as a way to reduce the overall capital gains
tax that you or your heirs would have to pay.
On the other hand, you’ll
need to consider whether keeping the asset would increase your estate valuation
to a level that triggers unwanted estate tax liability.
Basis amounts also work in
reverse, meaning there could actually be a reduction or “step down” in tax
basis if the value of the asset at the time of inheritance is lower than the
original price paid.
We’re finding devaluation is
increasingly common as the millennial generation is not as interested in
purchasing antique furnishings. A millennial generation with more frequent
relocation, less time to maintain assets (think polishing silver) and smaller
home sizes contributes to declining market values for collectibles being handed
When collectible assets are
held for at least one year by an investor (i.e., a beneficiary who is not
acting as a dealer in that type of asset), then long-term capital gains tax
One important fact is that
federal long-term capital gains rates on collectibles are higher — a whopping
28 percent — no matter the level of your adjusted gross income (unless you also
owe the 3.8 percent surtax). That compares to a top long-term capital gains tax
rate of 20 percent (23.8 percent with surtax) on other types of assets.
especially for higher income beneficiaries, is that sale of collectibles held
less than one year are taxed at personal income tax rates. If you inherit a
collectible and later sell it at a loss (compared to the basis you receive),
your ability to write off such loss will depend on whether there is any
evidence of “personal use.”
For example, if you inherit
a valuable piece of artwork, hang it in your home then sell it at a loss, the
IRS may reduce or eliminate the amount of loss you can deduct on your income
taxes. If a collectible is held strictly for investment purposes, then you can
usually deduct the loss. A CPA or estate tax attorney can help you determine if
inherited collectibles are likely to be treated as personal use or investment
Depending on the asset value
and/or state laws, estate tax also may apply to collectible assets passed after
death. In many cases, reporting requirements hinge on either asset value, total
estate value, or both.
Attorneys are quick to point
out that there is no statute of limitations for estate tax fraud, so regulators
can hold someone liable for tax audits or penalties indefinitely. There are
plenty of real world examples of heirs owing taxes or penalties and estates
forcing an asset sale that ultimately erodes market value and reduces the total
amount inherited by beneficiaries.
What should I do to prepare?
There’s no way to guarantee
smooth disposition of your collectibles and personal property. Market value,
demand, and family dynamics change over time.
There are numerous planning
alternatives that can lessen the estate tax burden imposed on collectibles.
Here are eight planning
techniques you can initiate while you’re alive to improve settlement of these
assets upon your death:
Obtain one or more
appraisals from certified experts. You may also want to request a certificate
of authenticity for high value and rare items.
Keep records of purchase
date, price, appraisals, damages, insurance coverages and cost of any
improvements such as refurbishment or repairs. For collections, consider making
a list of all the individual items in the collection and record the above
information for each piece in the collection. You may also want to include
selling dates for items of a collection and the names of past buyers and
sellers as they may serve as a ready market for the collection.
Talk to your heirs and ask
which items are most important to them. That will give you an idea of potential
disagreements about the inheritance of particular items. Make sure any promises
to pass down certain items to a particular person are clearly written in your
Consider ways to equalize
inheritance amounts and ways to respond to potential claims of fairness that
may arise among your beneficiaries. It’s tempting to leave this difficult task
to your chosen executor, but that person could have a conflict of interest,
especially if they are your spouse or a benefiting adult child.
Consider taking advantage of
annual or lifetime gift exclusions by gifting personal property during your
Articulate in your estate
documents who will bear the cost of storing or shipping items, especially if
intended heirs reside out of state. With more inheritors living farther away,
it’s increasingly common to include language stipulating that an estate will
bear the cost of storage during estate settlement. Consider whether
beneficiaries have the means to cover what could be expensive delivery of
larger or fragile items they stand to inherit.
benefits of gifting to charity, keeping in mind regulations and confirming that
the receiving charity can handle the management and sale of the donation. Donor
Advised Funds may be a useful tool for gifting collectibles, depending on the
fund sponsor. To learn more, read: Are donor
advised funds right for your charitable giving?
Notify your investment
adviser, CPA and estate planning attorney of collectibles that may have value.
You may also wish to have a discussion with your executor to make them aware of
the special nature of this personal property and to alert them to arrangements
you’ve made to preserve the asset value or to respond to potential family
Becoming aware of the unique
laws that pertain to valuable artwork and other collectibles can help ensure an
orderly distribution of your treasured collectibles.
Taking a few simple steps
now can help maximize value to your beneficiaries by minimizing taxes, and
perhaps most importantly, reducing family disputes.
here for the original article form WTOP.