Given that the 2015 tax filing deadline is imminent, taxes and the potential reduction of tax liability are on the minds of many of our clients. Some of our clients are fortunate enough to own collections of valuable personal property, such as artwork, cars and the like. Our estate attorneys are in the position of advising clients how to dispose of such personal property and how to reduce potential tax liability.
For purposes of this post, let us assume that the valuable collection contains artwork. It is prudent for the owner of such a collection to make a detailed catalog of the individual components of the collection. That way, it may be easier to keep track of the possessions. Gift and estate taxes could be due to the extent that an event of a public nature occurs, such as a sale or auction, or museum loan of the artwork. If the owner of the artwork merely decides to give a work of art to his daughter, who will privately display it in her home, then such an act may be unlikely to trigger the interaction of the tax authorities.
If the artwork is given to an institution during one’s lifetime, then the value of such item can be deducted from the donor’s taxes. Should the artwork be given to an individual and be valued at less than $14,000, then the annual gift tax exclusion will apply to make this event not taxable. Once a person passes away, estate taxes may be due, depending on the value of the estate.
In general, it is better to have loved ones select items from your art collection while you are alive, since gift taxes are charged at a lower rate than estate taxes. Also, one can be more certain that the artwork will not be “lost” and will go to the person intended. However, once it is determined that taxes cannot be avoided, determining the fair market value is necessary to have a foundation for the levying of the tax due. Appraisals are often used to determine fair market value. When it comes to artwork, highly specialized appraisers are necessary because the appraiser needs expert knowledge in the subject matter. Also, each work of art is by nature unique and may not have been subject to sales, making value difficult to determine.
Should the artwork not be distributed to intended individuals during one’s lifetime, then the artwork will be distributed upon death. A will can be drafted by a qualified attorney to direct whether a particular individual or institution will receive the artwork. The artwork could be specifically identified in the will and directed to be left to a particular person. It should be noted that a specific bequest could trigger tax implications, while on the other hand specificity insures that the intended person will receive the item. If the artwork is not specifically identified in the will, then it will be deemed to be part of the residuary estate and will become property of the person(s) or institution identified in the residuary.
While representing our estate clientele , our attorneys submit the appraisal along with the estate tax return, so that the value claimed on the tax return will be technically supported rather than subjective. The tax authorities have been known to challenge appraisals, but such a challenge is unlikely if the appraisal is prepared by a specialist. Appraisals are also meaningful to support deductions claimed for gifts made. For instance, if the donor gives a work of art to a museum, the value determined by an appraisal can support the amount of the deduction claimed for the charitable gift.
The value of collectibles can be fluid, as they are inherently a “want” rather than a “need”. In a strong economy, artwork may be purchased readily and the price of particular artwork may skyrocket. For this reason, only a relatively current appraisal should be used. Our attorneys would be pleased to consult with you in order to reduce tax liability and to draft documents consistent with your intent.