Collecting works of art or other valuables can be a passion for many people. Often such a hobby is more about enjoying the art or medium itself than ensuring financial gain. However, once you have amassed a sizable collection, what do you expect to happen to it after you die?
It is important that your estate plan addresses your art separately from your other assets.
The first step in estate planning for your collection is to document it. You should not only have the collection appraised, but also take photos of each item and gather all documentation relating to the authenticity and origin of the pieces in your collection, including artist’s notes, invoices from sales or insurance policies.
When considering what to do with an art collection, you have three main options:
- Sell the collection. If your family isn’t interested in caring for your collection after you’re gone, you might want to sell it.
If you sell the collection during your lifetime, you will have to pay capital gains taxes on the increase in value of the collection since you bought it. The capital gains tax rate on works of art is 28%, compared to 20% for other assets.
If the collection is sold after your death, it will be included in your estate, which may increase the value of your estate for estate tax purposes, but its value will be “increased”. This means that if your heirs sell the collection, they will only have to pay capital gains tax on the amount by which the pieces have increased in value since your death.
- Leave the collection to your heirs. You can give your artwork to individual family members, but a better approach may be to place the artwork in a trust or limited liability company (LLC). The trust administrator or LLC manager you appoint will be responsible for maintaining the collection, including maintaining insurance on the artwork, arranging storage, and taking decisions regarding the sale and purchase of parts. You can leave instructions for the care and handling of the collection. All profits from the sale of items would be divided among the beneficiaries of the trust or the members of the LLC.
- Donate the collection. You can donate your artwork during your lifetime and receive an income tax deduction based on the value of the items. This can be a good way to pass on your collection while avoiding capital gains tax. If you choose to make a gift as part of your estate plan, your estate will receive a tax deduction based on the value of the collection.
Deciding which option to take will depend on your situation and your family’s interest in collecting. Talk to your attorney to determine the best option for you.
Last modification: 06/24/2022