Planning how to distribute a collection passionately assembled over a lifetime can bring up difficult questions about mortality, family dynamics, and taxation. No wonder so many collectors keep the topic “stuffed in a drawer.” Even those who embark on a journey to figure out what to do can run into surprising roadblocks.
Understanding and Managing Resentment
Tom and Hillary spent a lifetime collecting. They love the thrill of the hunt and being part of the art-world community. They continue to be active collectors but at a much diminished pace from their peak collecting years. They have three adult children, all with their own independent lives. Their children enjoy the collection, but it is more about the value of it than a love or deep appreciation for the artworks themselves. None of the children have homes or lifestyles that are consistent with owning valuable art. Moreover, they all harbor different levels of resentment toward their parents for all the time and money they spent collecting. The children keep their views about their parent’s “pride and joy” tucked away, but every indication is that they will sell the collection immediately once their parents pass. Two museums where Tom and Hillary are active have their eyes on some of the works in the collection. A ground war already broke out between the museum directors who are each trying to position their institution for important bequests. Tom and Hillary’s children caught wind of this, which only increased their sense of resentment and concern about how the collection will be treated when their parents pass away.
Generosity That Backfires
Beth and John are active collectors. They have two sons, both of whom like art and have since become collectors in their own right. A number of years ago, when the sons were adults, Beth and John elected to gift a painting to each of them. Because the sons are intensely competitive with each other, the parents knew it was important to do this in a transparent way so that neither son would feel the other got a better deal. Beth and John gave their sons copies of their collection appraisal document. They were told they could select something, but it had to be worth no more than $250,000. Not surprisingly, both of them picked objects worth close to the $250,000 value limit; luckily it was not the same object. The sons were very grateful. An implicit, but not explicit, part of the parent’s gift was that the sons would not sell the works. Ten years later, one painting was struggling to maintain its original value while the other was worth multiples of that amount. The son with the more valuable painting decided to sell it. The son with the less valuable painting cried foul and demanded his brother share sale proceeds with him, which he refused to do. The aggrieved son then approached his mother, who was the only surviving parent at the time, and asked her to adjust her will to compensate him for his brother’s actions. No good deed goes unpunished.
Who to Trust When It Comes Time to Sell a Collection
Seymour, a self-made businessman, has assembled a valuable collection in multiple categories with his wife. They are very philanthropic and have arranged their estate so that the entire collection will be sold after they have both passed away to fund charitable causes that are important to them.
Until that time, they intend to live with the collection. Their children, who are not collectors, applaud their parents’ plan to donate much of their wealth to charity. Seymour is confident that his trust and estate lawyers did a great job planning the estate, but he is concerned about how that team will execute the plan to sell the collection. Given the size and scope of it, selling the collection will be a long and complicated task. Because every dollar raised from the sale will go to charity, Seymour wants to make sure someone schooled in the art world will act on their behalf as a fiduciary to maximize sales proceeds and minimize sale costs. He is deeply concerned about who to trust for this important future assignment.
A FRAMEWORK FOR CREATING A PLAN
These stories illustrate the need for collectors to have a legacy plan they understand and believe in. Here are some closing thoughts on how to create one.
The first step is a candid assessment of the family’s goals and attitudes toward the art collection. The type of questions to be answered include: How important is it to keep the collection intact during the collector’s lifetime? After the collector passes? What promises, either implicit or explicit, have been made to family members, museums, or other institutions? Are potential heirs ready and able to take responsibility for the collection, or are they primarily interested in what it is worth and how it will be distributed to them?
Next is to understand collection value and risk. Collectors need to get fair market value (FMV) estimates for each item in their collection.[i] Professionals should be brought in to provide this information. It is also important to identify where there is valuation risk in the collection. For example, which artists in the collection have peaked in value versus artists who may see meaningful appreciation over the next five years? Having a perspective on risk is important, because it can influence which works to sell, gift, or donate.[ii]
Armed with this information, collectors need to step back and think about a collection dispersal plan independent of taxation. Taxation will no doubt influence the ultimate plan, but collectors can get wrapped up on tax issues too early in the process. It is generally better for them to think through what they want ideally like to accomplish with the collection. Their tax, legal, and financial advisors can then help them weigh alternative methods to achieving it.
Legacy planning can bring up uncomfortable issues that some collectors and their families may prefer to avoid. But deferring decisions about the fate of a collection can lead to disagreements and bad feelings among the heirs as well as higher estate taxes than would be the case with advance planning. The worst outcome is when the wishes of the collectors are not implemented after they pass because the heirs did not understand what they wanted done or the sale was entrusted to unqualified sales agents. Although there is no way to make legacy planning simple, it is important to remember that only three things can be done with the collection during either the collector’s lifetime or posthumously: sell it, donate it, or gift it. You can’t take it with you.
[i] This is the value at which a willing buyer and willing seller would agree to transact over a reasonable time period. FMV is different from an insurance appraisal, which is an estimate of the immediate retail replacement value of an object. FMV estimates, which are generally lower than insurance estimates, are what the IRS will look to when examining the value of an estate.
[ii] For example, suppose you have two artworks both with a FMV of $100,000, but one is most likely fully valued while the other may see appreciation over the next five years due to an upcoming museum retrospective. If the collector is looking to gift assets to get them out of the estate, then the collector may want to gift the artwork with greater appreciation potential.