Art and Collectibles – Part II

Summary:

Last month’s checklist addressed record keeping and income
tax consideration for your art and collectibles. This month’s column addresses
additional issues. The topic is so broad and complicated that the following
should be viewed at most as a starting point to make you aware of some of the
many issues to consider.

Appraisals.

Appraisals of
art and collectibles is common, and an important component of planning.  Most people assume that all appraisals
have the goal of determining the value of the art or collectibles being
appraised. But “value” has many definitions depending on the context. You
have to clarify the correct definition of “value” to obtain the desired result.

■ An appraisal to be certain your art is
appropriately insured should be aimed at identifying the “replacement value” of
the property. This is the highest price that would be required to replace a
property with another of similar age, quality, origin, appearance, provenance
and condition. The replacement purchase should be assumed to be consummated
within a reasonable length of time, and in an appropriate and relevant market.
Similar items are those from comparable manufacturers, craftsmen, artisans,
designers, using similar materials, close in size, date, importance, similar
aesthetic qualities, and appearance.

■ If you’re planning a gift of collectibles to your
children or a charity, for tax purposes your appraiser should be directed to
determine the “fair market value”, as that term is defined in the tax laws. “Fair
market value” is defined as the price at which the property would change hands
between a willing buyer and a willing seller, neither being under any
compulsion to buy or sell and both having reasonable knowledge of the relevant
facts. Treas. Reg. Sec. 20.2031-1 (b).  The appraisal report should identify, compare and contrast recent
sales of comparable items sold in the market where the items are most commonly
traded.

■ A qualified appraisal must be prepared, signed, and
dated by a qualified appraiser.
The appraiser should: hold himself out to the public as an appraiser or
performs appraisals regularly; be qualified by background, experience, and
education to make appraisals of the type of property being valued; not be the
donor, donee, or someone employed by the donor or donee, or the dealer who sold
the art to you; not charge based on a percentage of the appraised property; understands
that an intentionally false or fraudulent overstatement of the value of the
property may subject the appraiser to a civil penalty under IRC Sec. 6701;  understands that a substantial or gross
valuation misstatement resulting from the appraisal used in connection with a
tax return may subject the appraiser to the penalty under IRC Sec. 6695A; and is
not barred from presenting testimony by the Office of Professional Responsibility,
Reg. 1.170A-13(c)(5). 

Estate Planning.

There are a myriad of
estate planning implications and considerations to your holding art and
collectibles. The following discusses a few of these.

■
Code Section 2036(a)(1) is a major
landmine in estate planning in that it can pull assets back into your taxable
estate based on your having retained some inappropriate “strings” to the asset
involved. Property transferred by your, during your lifetime, is brought back
into your gross estate if you retain the right to receive the income from the
property, or if you retained the “possession or enjoyment” of the
transferred property, for: (1) life, (2) a period ascertainable only with
reference to your death (e.g., monthly, except for the month in which you died),
or (3) a period that does not in fact end before your death (e.g., 5 years if you
died during this period).  So if you
give your daughter your Miro, but you retain the right to display the painting
in your home for your life, the full value of the Miro is taxable in your
estate regardless of the “gift”.

■
Tax allocation clauses in your
will are vital to address. Many wills allocate the tax burden in proportion to
the value of assets given. However, if one heir receives a bequest of $3
million in securities, and your other heir $3 million in collections, how will
the heir with the collections have the cash to pay his share of the estate tax?
Think through “standard” clauses to make sure the result is what you actually
intend.

■ Another “will” trap for art and collectibles is
to be certain that it is clear which provision of your will governs the
distributions of your art and collectibles.  Most wills contain a general clause governing the
distribution of tangible personal property, which will generally cover art and
collections. However, if you have important pieces that you want distributed in
a specified manner you should have greater clarity then merely a generic
clause. You might leave your furniture and certain art with your home that is
being bequeathed to your new spouse, but wish your collection of Chinese
porcelain vases to be bequeathed to your daughter. Absent specific language,
the general bequest of tangible personal property would cover this. If you own
a business, and the business actually purchased and displayed many of these
vases, the bequest of the stock in the business will include the vases owned by
the business unless you take specific action.