Many of your clients have spent years quietly amassing fine art, antiques, vintage cars, luxury watches, rare wines, stamps and coins, even limited-edition books and baseball cards. But you wouldn’t know if you didn’t ask them, because many collectors prefer to keep their treasures private. Collections give owners immense joy and can amount to a sizeable portion of their net worth. But deciding what to do with their prized collections when they pass on can be problematic.
Collections should be valued periodically as part of your clients’ estate planning, but that can be challenging. Unlike stocks or bonds, which trade on well-established global exchanges, the value of a collection is often influenced by a small number of specialized buyers and sellers. Valuations can be highly subjective, even with the rise of online exchanges for most collectible asset classes.
For estate planners and wealth advisors, this illiquidity also brings family dynamics into play. Collectors may wish to preserve family heirlooms, but heirs may not have the same passion or expertise to maintain them, let alone the space to house them properly. Heirs may also want to sell or donate the collection, but then deep-seated guilt or family friction can come into play.
Tax Challenges
As tangible personal property, collectibles are taxed at a 28% federal capital gains rate compared to 20% for stocks. And if your client has a valuable collection, they may have a taxable estate that must be dealt with when they pass. This may cause the collection to be liquidated at “fire sale” values to pay the taxes due nine months after death.
Empty Hook Syndrome
Whether we’re talking about fine art or baseball cards, people make the mistake of thinking their kids can just take their collections after they die. But your clients should have clean records of their purchases if they (or their heirs) ever want to sell them. Provenance is extremely important, especially when it comes to fine art. If the seller doesn’t have proof that the artwork was included in their estate, and that they’re the rightful owners, no respectable art dealer will buy it.
I’m still amazed at how few advisors discuss collectibles with their high-net-worth clients. I remember many years ago, an advisor brought me in to help one of his clients with estate planning and planned giving. It was a complex plan, and when we went to the client’s winter home in Arizona to present it, we were shocked to see every inch of wall space covered with astounding paintings and sculptures. The collection must have been worth millions of dollars, and the advisor was completely unaware of it. Why? Because it never came up during the planning discussions.
So, we went back and came up with a revised succession plan that accounted for $2 million to $3 million worth of art that was missing from the previous plan. Like many collectors, the client dealt with only one or two dealers representing one or two artists. So, he had reasonably good records, but he certainly didn’t follow the current valuations closely. He bought the paintings because he loved them, not to make money. When he passed away, the children were each gifted their favorite pieces, and a well-known dealer sold the rest of the collection. The sales could take place gradually rather than all at once because the collection no longer posed an illiquidity problem.
Opportunity for Advisors
Even if you don’t know a Van Gogh from a Van Winkle, you’ll want to get up to speed on valuing, selling, gifting and transferring collectibles. They’re often more important to clients than their investable assets. Even better, if you become known as an advisor who’s conversant in collections, it can open the door for countless referrals.
In your discovery conversations with a new client, ask them if they collect things. If they have a substantial collection but not good records, you can play an essential role by helping them accumulate accurate records. You can find people who are experts in the various collectible classes and know how to inventory and catalogue collections.
You can also play a valuable role as a family mediator. A client may have a valuable car collection, but the kids may not want it because of the unpleasant memories the collection invokes. “I don’t want the cars,” they might tell you. “The cars were what kept my dad away from us my entire childhood. I hate the cars. He cared more about the cars than he cared about us.” Now you have the opportunity to assist with a tax-efficient disposition or gifting strategy.
On the flip side, if the kids think they do want the cars, they may not be prepared for the cost of all the insurance, climate-controlled storage, upkeep and delicate repairs involved with maintaining them. This is another area where you can be a big help to the family.
If the heirs ultimately decide to sell the cars, a number of major car auction houses will sell them on consignment. Assuming the basis of the cars was stepped-up at death, there should be no tax on the sale. You can also help heirs transfer the cars to a charitable remainder trust or pooled income fund to take a deduction at the cost basis and avoid capital gains. You can also help your client by gifting artwork and other collectibles to museums. That way, the donation is considered a gift, so the donor receives a deduction at full market value.
IRS Scrutiny
You and your clients don’t want to play fast and loose with the fair value of collectibles. The Internal Revenue Service has an entire art division due to all the difficulties involved with valuing art. Some of the world’s most renowned art experts work for the IRS. If your client files Form 709 to take a deduction for gifts of their collectibles, ensure each gift’s claimed fair market value is accurate and defensible.
When working with HNW families, don’t just ask them if they own a collection or plan to start one. Ask them if they know what their collection is worth and when they last had it documented and valued. Also, ask if it’s insured and whether they’ve talked to their heirs about their interest in the collection. Parents are often surprised to learn their kids don’t care about their “priceless” heirlooms. Sometimes, more than one child wants the collection, which is an asset that can be difficult to divide. It’s never too early to get this discussion out into the open.
Finally, when valuing the collection properly, encourage your clients to use a professional appraiser. A professional appraisal will likely cost more but will help significantly with insurance coverage and estate planning. Remember, top appraisers are extremely busy and may need to be booked well in advance. As with many aspects of planning, don’t let your clients wait until the last minute.
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