The Democratization of Art - Ch.2 - Mary E. Klein

Art Strategies to Maximize Wealth Preservation 
 Chapter 2 of 4

1

Art Strategies to Maximize Wealth Preservation (Chapter 2 of 4) I wrote this white paper for the Family Office Association. For online reading purposes, this white paper is divided into 4 chapters. There’s a link to Chapter 3 at the end of this chapter.

Art Strategies Strategies for managing and protecting the value of an art portfolio range from doing little such as keeping it on private home walls, without insurance or legal documentation, to donating the art to a charitable beneficiary or creating a museum during one’s lifetime. Family Offices should consider transparency with family members in building these strategies with their advisers.

1. Sell Art Selling art during life or at death will have estate and income tax repercussions, and advisers should be consulted before doing so. A better economic and tax result may result from borrowing on the art, which also allows the collector to continue to enjoy the art.

2. Buy Insurance Life insurance funded by gift tax exclusions is another mechanism for generating cash flow to pay estate taxes on art. Irrevocable Life Insurance Trusts (ILIT) are established to accomplish this strategy and require aligning beneficiaries of the art with beneficiaries of the ILIT proceeds.

In addition, the potential future value of the art at death must be matched to the life insurance death benefit.

3. Gift Art to Non-Charitable Beneficiary Gifting of art (or other assets) to beneficiaries during a collector’s life time may be done in anticipation of the appreciation of the art and impact on estate taxes.

The annual and lifetime gift tax exclusions are $15,000 per beneficiary per year and approximately $11.18 million per person.1 Collectors may transfer art into a LLC as previously The final number has not yet been published as it will be based on chain CPI, which is to be finalized. http://docs.house.gov/billsthisweek/ 20171218/CRPT-115HRPT-466.pdf, pgs. 540-42.

1

2

discussed rather than gift the art. This LLC strategy allows a collection to be kept together and preserves flexibility and valuation.

4. Donate Art to Charitable Beneficiary Art planning strategies may be charitably motivated. The collector may choose to donate art during life or at death, a personal preference influenced by two factors: 1) wanting to hold and enjoy the art and 2) the desired timing for receiving the tax deduction. Art donated to a charitable beneficiary at death results in an estate tax deduction equal to the value of the art.

Leaving a collection to a charitable organization is also a way to achieve an income tax deduction during the collector’s lifetime.

For donations during life, there are different rules and treatments based on whether the art is regarded as ordinary income property, long-term capital gain property or tangible personal property. Art held by a collector generally is treated as capital gain property. Ordinary income treatment generally applies to artists who sell their works. Donees receiving art from the individual who created the art also would treat such property as ordinary income property.

Whether the charity is public or private also dictates the amount of the deduction. Finally, the deduction at fair market value or cost is based on whether the gift is related to the organization’s exempt purpose (i.e., donating art to a museum would clearly be related to the organization’s exempt purpose).

The table below presents tax deductions permitted for donations made during the collector’s life:

TYPE OF PROPERTY ORDINARY INCOME

LONG-TERM CAPITAL GAIN

TANGIBLE PERSONAL

CHARITY PUBLIC

DEDUCTION PERMITTED Deduct up to 50% of adjusted gross income (AGI) by lower of fair market value (FMV) or cost basis

PRIVATE

Deduct up to 30% of AGI by the lesser of FMV or cost basis

PUBLIC

Deduct FMV of art up to 30% of AGI

PRIVATE

Deduct FMV of art up to 20% of AGI if publicly traded stock otherwise use cost basis

PUBLIC

If property unrelated to charity’s purpose to a public charity then deduct up to 50% of AGI by lesser of FMV or cost basis

PRIVATE

If property unrelated to charity’s purpose to private charity then deduct up to 20% of AGI by the lesser of FMV or cost basis

3

(Note: Deductions unchanged under H.R.1 Tax Reform legislation)

Families that have an interest in their legacy and art and wish to share it with the public may consider using either a public or private museum as a venue for their art. Both have opportunities and tradeoffs from a tax, legal and cost standpoint, which is discussed further herein.

There may be an inclination towards delay in any planning and maintaining the status quo by keeping art within family member borders. Ultimately, Form 706, Federal Estate Tax Return must be filed as part of the estate administration process. This form can be used by tax authorities to investigate the exclusion of art by estates likely to hold art in their investment portfolio.

Link to chapter 3 About Family Office Association: 


Family Office Association is a global community of ultra-high net worth families and their single family offices. It is committed to creating value for each family that we serve; value that grows wealth, strengthens legacy, and unites multiple generations by speaking to shared interests and passions.

About the author:

Connect with me on LinkedIn Mary Elizabeth Klein is a Family Office and Private Equity Executive providing sustainable solutions for businesses. Mary has extensive experience in building profitable businesses and developing relationships through strategic operational and tax execution and technological improvements. She is passionate about positioning organizations to emerge successfully through change by establishing structure and a foundation to stabilize them and expand their platform for growth. 


4