Wealthspire
By Oliver Pursche
April 19th, 2024
Owning and ultimately gifting art and collectibles brings unique challenges to its current owners and potential inheritors.
Unlike traditional investments and real estate, the marketability of art and collectibles, whether in the form of fine art, cars, jewelry, wine, furniture, books, or manuscripts, can be erratic and often poses problems when the IRS comes knocking for its share of taxes.
According to reports, over half of owners of collectibles have never had their collection appraised, about two-thirds of collectors have not discussed their collection with a financial advisor, and almost 40% admit to not knowing the current value of their collection.
Determining the value of art and collectibles for estate tax purposes can be subjective and complicated. Factors such as the provenance, rarity, condition, and market demand all influence value. Appraisal by qualified professionals familiar with the specific type of art or collectible is crucial to establish a defensible valuation.
I urge clients to clearly identify and record who owns the art or collectible, where the piece is kept, and how it is used.
For example, let’s say you are gifted a $2,000,000 painting by your parents, but it remains in their home. You should clearly record this arrangement; otherwise, there is a risk that the IRS will not recognize the gift and include it in your parents’ estate upon their passing. Moreover, if the painting remains in the parents’ home, a smart strategy (for clarity’s sake) is for you to “pay” your parents a storage fee, or for your parents to pay you a “use” fee. The purpose of this is to be able to clearly demonstrate to the IRS or anyone else who might dispute your ownership that you do in fact own it and have for a while.
