By Ramsay H. Slugg
1. Do not leave the ultimate disposition of your collection to chance. It is surprising how many collectors do not engage in this process and leave the ultimate disposition decisions to their family and advisors, most or all of whom do not have the intimate knowledge of their collection.
2. Use a competent and experienced advisory team. The team should include art experts; such as dealers, gallery owners, curators and restoration experts; risk management professionals; qualified appraisers; private bankers; and attorneys and accountants, all with experience in planning with art. Not only do they need to be on your advisory team, but they need to communicate with one another.
3. Do appropriate risk management. Engage an insurance expert who is specifically experienced with art. You may or may not purchase insurance, but do consider the security of your collection, from theft, fire, water, storm, or other casualties.
4. Prepare and maintain an inventory. This is true for all assets in the form of financial statements, but it is particularly true with respect to art and other collectibles. An inventory is critical to every stage of the planning process, and should be kept as current as possible.
5. Know the value of your collection. Insurance providers and lenders, if any, will require appraisals and periodic updates. Appraisals will be required for income, estate and gift tax purposes. Even if not required, you should have your collection periodically valued, perhaps every three to five years, depending on how actively you are collecting and on what you are collecting.
6. Maintain records. As part of your inventory, maintain records of ownership and, as the value and significance of the collection grows, further evidence of provenance. This includes all contracts to purchase or sell, actual bills of sale, loan agreements with museums, and so on. Consider title insurance if you have doubts about the provenance of any piece you are considering for purchase.
7. Ask the big question. Involve your family. Do they share your passion for your art? If so, planning should focus on how to transition the art to them, whether that is now or later. If not, and there are other financial assets or you feel they are otherwise provided for, then explore your charitable options.
8. Consider liquidity. Art is by its very nature an illiquid asset. It does not provide cash flow or income during life, and although it may be sold, that comes with a high tax cost, and perhaps not quickly enough to address estate liquidity needs. Art lending may be an appropriate solution to address this lack of liquidity.
9. Consider charity. Given the expense of selling, and the opportunity cost of wealth transfer, the “charitable solution” is often the most tax efficient way to keep your collection intact. And if the “charitable solution” is right for you, consider lifetime donations as this will entitle you to a federal income tax charitable deduction in addition to estate tax savings. Most important, do not surprise the museum (or other charity), if you are leaving art to them. Not all museums will want your art. It may not fit their collection, or their storage vault. Talk to them now about your wishes, even if they are not carried out until later.
10. No surprises. Give your family, and your personal representative, clear direction on what your estate will include, and clear direction on what you want to happen. And while you are going through the planning process, make sure your advisors know the extent and value of your collection.
Trying as the planning process may seem, try to enjoy the process of planning for the disposition of your collection. It is certainly not as much fun as building the collection, but it is ultimately just as important.
Ramsay H. Slugg is a Managing Director and member of the National Wealth Planning Strategies Group at U.S. Trust. Previously, he was the National Practice Director of Bank of America’s Philanthropic Management group. He has also served as the Central Region Director of the Bank’s Charitable Management Services Group, and the Central Region Director of the Wealth Management Consulting Group.
Mr. Slugg is admitted to practice law in Texas, is a member of the State Bar of Texas, the American, and Tarrant County Bar Associations, the Tax and Estate Planning Section of the Tarrant County Bar (Chair, 1999-2000), the Lone Star Chapter of the Partnership for Philanthropic Planning, and the College of the State Bar of Texas. He currently serves as Co-chair of the American Bar Association’s Real Property Trust and Estate Law Art and Collectibles Committee, as well as several other leadership positions. Mr. Slugg received his J.D. degree from the Ohio State University College of Law, and his undergraduate degree from Wittenberg University.