Art collectors can spend thousands of hours and hundreds of thousands of dollars or more in collecting paintings, sculptures and other works. But many of those collectors spend far less time and resources deciding what happens to that collection after they die.
Whether you collect art as a labor of love or as a means to diversify your investment portfolio, it is important to invest time in deciding whether to donate all or part of the collection to a museum, gift it to family and friends, or sell it and distribute the proceeds.
“The biggest mistake people make is not planning,” says Ramsay Slugg, a managing director and wealth strategist with Bank of America Private Bank and author of the Handbook of Practical Planning for Artists, Art Collectors and Their Advisers (ABA Books, $90). “It really needs to be thoughtfully discussed.”
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Know what you own. Experts recommend that you start by creating a comprehensive inventory of your collection. “Get the facts first,” says Anne-Marie Rhodes, the John J. Waldron Professor of Law at the Loyola University Chicago School of Law. “Historically, that is the best way to start.”
An art collection inventory should be more than a list, experts say. Ideally, each piece has its own file with the names of the work and the artist, a photo of the work, its location and any pertinent paperwork.
Paperwork could include the bill of sale from your purchase, and if obtainable, previous bills of sale, as well as museum or gallery catalogs that include your artwork or similar pieces created by the same artist around the same time as yours. Correspondence from the artist is very desirable, especially if it mentions the work you own; ask the gallery owner who sold the work if he or she has any letters or notes and can send you copies. Proper documents can establish the provenance, or history, of the artwork and attest to its authenticity, which could raise its value.
Find a suitable appraiser. Once you know what you have, you need to learn what it is worth. Websites such as ArtNet.com, ArtPrice.com and MutualArt.com, which track auction prices of many artists’ work, may help you decide which of your works are worth the cost of a professional appraisal. You don’t want to spend more on an appraisal than a painting is worth.
Appraisers usually charge by the hour, including time spent on inspecting and researching a work, then estimating its value and preparing an appraisal report. It is not unusual for an experienced appraiser to charge $150 to $200 an hour, with a $300 minimum; appraisals that require a lot of research can take more than one day and cost thousands of dollars.
Before you hire an appraiser, come to a specific agreement with him or her on the services to be provided, all costs involved and a deadline for delivering a final report. You can save time and money by putting everything you want to be appraised in one location, along with documentation you have collected.
There are several ways to find an appraiser. The gallerist who sold you the work may recommend one, or you can ask a local museum for a referral. Alternatively, three professional societies for appraisers—the American Society of Appraisers,the Appraisers Association of America and the International Society of Appraisers—have tools on their websites to help you find appraisers near you.
Alan Bamberger, an art consultant in San Francisco, recommends using an art appraiser rather than a general appraiser. He and other experts also advise that work should not begin until you and the appraiser have the specific agreement detailing the work and costs. Avoid appraisers who offer to work for a percentage of the sale price or want to buy the artwork themselves.
Before calling an appraiser, talk with your financial adviser and insurance broker about the kind of appraisal you need. Fair-market-value appraisals, for example, estimate what art is worth on the open market; this helps to estimate the amount that will be included in your estate and determines the tax deduction you could claim by donating art to charity. Your insurer may want a replacement-value appraisal, which estimates the cost of replacing lost art quickly; the need for speed may result in a higher appraised value.
Talk to your heirs. Once you know what you have and what it is worth, you should schedule a family meeting to help determine what to do with your collection after you die. Anticipating death is understandably uncomfortable for many families, but a family conversation can help to avoid rancor and lawsuits later.
At the gathering, ask if anyone has the passion—and resources—to maintain the collection. If not, ask if anyone wants a particular piece. Be prepared to be disappointed. Heirs often choose to sell all or part of art collections they inherit. “More often than not, the next generation doesn’t like the same art,” Slugg says.
Make no promises at the gathering. Remind the participants you are only accumulating facts to make well-reasoned decisions. “It’s an emotional asset and an illiquid asset, so it requires time to plan carefully,” Slugg says. Be frank if you are considering selling the entire collection or bequeathing it to a charitable institution.
Minimize taxes. As you consider the future of your collection, consult an estate-planning lawyer or accountant about the tax implications of any move you make.
If you sell an art piece, your tax tab will be based on how long you’ve owned it. Capital gains on art owned for more than one year are taxed at 28%; if owned for less than a year, capital gains are taxed as ordinary income and subject to rates as high as 37%. Plus, you may owe state and local income taxes.
There are several strategies to minimize taxes. You can, for example, look for a museum or other nonprofit organization that is willing to accept your collection as a gift and has the resources to maintain and show it. This not only allows you to avoid paying capital-gains taxes, but it also lets you claim the collection’s fair market value as a charitable deduction. You also can make use of your annual gift tax exclusion each year. For 2020, you can give each of your children and grandchildren up to $15,000 worth of art or other assets without having to file a gift-tax return.
In any case, Mark Davis, a trust and estates lawyer at Engel & Davis in New York City, advises art collectors to document gifts, whether the beneficiary is a grandchild or an art museum. “If you are giving it as a gift, put it in writing,” he says. “Don’t just give them possession.”
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