One of the first estate planning clients I advised was a man with a comic book collection appraised at $44,000. Decades later, I wonder about the current value of his collection. Ever since that first client, I have observed mistakes people make in planning for their art and collectibles.
Below are ten mistakes to avoid when planning for art and collectibles in the estate you want to leave to your children, grandchildren, or other next generation beneficiaries.
- Not knowing if you are an art or collectible dealer, investor, or collector. Why is this important? There may be more favorable tax treatment for you as a dealer or investor.
- Under valuing the market value of the art or collectibles on a tax return. To prepare Federal and State estate and inheritance tax returns, undervaluing art or collectibles is a red flag that waves at the IRS tax auditors. Not reporting the art or collectibles on an estate tax return may cause civil or criminal sanctions, i.e. it is a bad idea.
- Not having a plan. Don’t assume your children want the art or collectibles. Ask them. If they do not want the art or collectibles, what is your plan? If you sell the property before death, there may be a large capital gain tax. Each person’s decision will be fact driven depending on many variables but there should be a plan.
- Not knowing the value of the art or collectibles. Without a professional appraisal, you may over or under value the actual market value of the art or collectibles. Aside from estate planning, how do you correctly insure the property? Have you talked with your insurance agent to know what besides paying the premium the insurance company will want, such as an appraisal including photos? The property may not be adequately insured or over insured. For estate planning, will your estate’s representative have adequate liquidity to pay any estate or other tax in settling your estate? Would you make a gift of art or a collectible to a specific person if you knew the value was much more than you thought, or much less?
- Not having a written inventory of your art and collectibles. If you are incapacitated and pass away, your legal representative will have a much easier task, and it will save time, aggravation, and money, by having an inventory of each piece of art and collectible. In the inventory, I recommend you include a copy of the purchase receipt or bill of sale, making sure the receipt or other documentation shows from whom you purchased, the purchase price, and the date of purchase. You may also want to add anything you know that may be special about the art or collectible that may add or detract from its market value.
- Not having documents to authenticate the art or collectible. Having documents to show that your art or collectible is authentic is part of determining its value. A piece’s history of ownership helps to prove its fair market value. Without this information, it will take longer for the appraiser to arrive at its value and that may translate into a higher appraisal fee because of the additional time and expertise to develop this information.
- Not insuring your art or collectibles. Every homeowner’s insurance policy I’ve read includes limitations on claims for art and collectibles, i.e. you will probably need a separate specialty policy to cover your art and collectibles based on an appraisal or agreed replacement value with the insurer.
- Not explaining to your beneficiaries what you intend to do with the art or collectibles. This goes back to the need to have a plan.
- Not confirming with the charity it will want the art or collectibles. If you will give to a charity, did you ask the charity if they will accept the art, and if so under what circumstances? Should you give the art or collectibles to the charity now or after you have passed away? Each person’s decision will be fact driven depending on many variables but there should be a plan.
- Not using experts for providing objective information for selling, buying, planning, and insuring your art or collectibles.
Not everyone has art or collectibles in their estate, but everyone has an estate. One of the most caring things one may do for their loved ones is to leave behind an orderly estate to settle.
We can help you plan your estate so you leave a legacy of good memories. When you’re ready, contact us by phone at 813-852-6500.