A Family Approach to Art Collecting

Art collecting for many is in their blood. It’s often a lifelong passion and love. There’s a certain rush and excitement that comes from finding just the right piece over and over again throughout a life time. With pride and joy these pieces are displayed in homes and as the collection grows thoughts about its future legacy begin to surface.

Plans need to be made, but sometimes it’s hard to think about that next step when collectors admire their favored pieces so much. This is why it’s important to have thoughtful advisors who understand the collectors’ loves, but also who can think practically from an investment and a tax perspective for future generations.

The Way of the Collector

Collectors might start amassing things as a kid like: comic books, charms, baseball cards, stamps and toys. Over the years as wealth and circumstances change the passion for collecting might move to fine art, sculptures, and rare coins or thousands of other interests, perhaps even representing a return to the love of childhood related memorabilia.

Avid collectors typically find that the hunger to seek out the next piece persistswhether it’s paintings by the Old Masters, impressionist art, vintage cars, figurines, do-dads, household accessories and even costume jewelry and toys. According to a Boston College study, 40% of high net worth individuals collect something.

“With collecting it’s not necessarily about the asset value, but about acquiring something you love and enjoying and admiring it,” says Gael Mendelsohn, who along with her husband Michael Mendelsohn, president and founder of the NYC-based art planning firm Briddge Strategies have been recognized by Art & Antiques as Top 100 Collectors. Over the past 20-plus years Gael and Michael have built one of the foremost contemporary folk-art collections in the country. Their collection includes works by: Morris Hirshfield, William Hawkins, Bill Traylor, Henry Darger, Martin Ramirez, Howard Finster and Thornton Dial Sr. Select pieces from their collection have been gifted to the Museum of American Folk Art, the Philadelphia Museum of Art, and other prominent institutions.

One of Gael Mendesohn’s newest favorite collections includes: sparkly celluloid bracelets from the 1920’s. As Gael says, “These bracelets are fun to collect because they’re wearable.” The same affinity Michael feels for his eyeglass collection, which encompasses both vintage and new glasses.

Moving from favored pastime to a legacy

A sentimental pastime is often how many collectors view their accumulation of “little” and “big” treasures. Some collectors may go so far as to intentionally neglect the asset worth or deliberately hide it from the IRS. If that’s the case, then it’s “Picasso or prison,” as Michael Mendelsohn, president and founder of the NYC-based art planning firm Briddge Strategies says. When art is hidden and lacks provenance it causes significant problems for heirs and may potentially wipe out their entire inheritance.

To protect the heirs from undue taxes and ensure that the legacy continues it’s best to have a plan for the collection.

Planning the art legacy – where to start?

Have a family meeting and discuss possible plans for the collection with the children. Recognize that some children might not share the same passion as the owners or that one child might like it while others do not. Work together when everyone is alive to find a solution that is agreeable to both collectors and heirs.

Elise Kindelan, an attorney specializing in estate planning cautions,”It’s often very difficult to spilt a collection among heirs and that it could likely cause friction, rivalry and be hard to draw the line.”
To avoid a potential family art war she recommends keeping the collection intact. This is a personal observation as Kindelman mentions and makes practical sense from an art asset perspective as well.

Michael Mendelsohn advises, “If the heirs view the collection only as an investment then there are lots of plans to satisfy the interests of all.” For example, the collectors may wish to have parts of the collection donated to a museum or a gallery. This approach ensures the continuation of their legacy and that their vision will be remembered. Both of these interests can be balanced.

When a collector makes a donation to a museum they become a philanthropist instead of just a tax payer. This expands the value of their estate by reducing the taxable income. Under IRS 501C collectors can give away part of their collection, what’s known as a fractional gift. It must be donated to a related use such as: an institution that studies art.

Michael Mendelsohn explains, “A fractional gift reduces the gross taxable income. The museum has the right to use the collection for 37 days a year, that’s 10% of the year.” With this arrangement the donated pieces can remain in the home so the collectors can continue to enjoy them.

Here’s how this plays out from a tax stand point:
If a collector earns $2M their taxable income would normally be $800K. By donating a portion of their collection (10%) they reduce their taxable income to $1.5M. Taxes are reduced from $800K to $600K. This $200K in savings can then go into a trust fund.

Assessing the art

Don’t leave the art collection up to chance and the auction houses. Michael Mendelsohn cautions, “Art sold at an auction house can cede up to an astounding 75 percent of its value when buy-ins, reserves, taxes and other variables are taken into account.”

When making plans for the collection analyze it and put together a history for each piece. If an artwork is a gift it creates tax problems at the point of sell since there is no cost basis, plus capital gains on art is 30%.

Tax limits and estate planning

When weighing plans for the art collection it is important to understand the current federal estate tax limits and whether the estate extends beyond these limits. Elise Kindelan, an attorney specializing in estate planning mentions, “Up to $1.5M for a single person and $3M for a married couple can be passed onto heirs’ tax free. This includes real estate, cash, mutual funds, insurance, personal property and art.”

Estates that go beyond this amount can establish a trust. For example, a single person, who owns a house worth $1.5M and has a coin collection worth $50K. The collection puts the estate over the tax limit of $1.5M. Without a trust the heirs would pay approximately 50% taxes of the collection valued at $50K. That’s $25K in taxes and in all likelihood the heirs may have to sell the collection in order to pay the estate tax.

In situations like this collectors can plan ahead to ensure that their children inherit the house as well as the art collection. Kindelman recommends clients in situations like this,”Set up an irrevocable trust, then transfer ownership of the coin collection to the trust.”

Another form of trust is what’s known as a revocable living trust. These are often established when estate taxes are not an issue.

With a trust you can write in language that directs the trustee to pass on the collection to certain heirs. It can also stipulate for instance, that the last bills and attorney fees are to be paid out of the estate.

Kindeleman mentions, “With a will the expenses of administering the estate (probate expenses and attorney fees) are far greater than when administering a trust (irrevocable or revocable). Trusts make it much easier on the heirs.”

Sources:

Michael Mendelsohn
Briddge Art Strategies
2975 Westchester Ave. Suite 205
Purchase, NY 10577
(800) 216-3852, (914) 325-4729
http://www.briddgeartstrategies.com/
email: mendelsohn@briddgeartstrategies.com

Gael Mendelsohn (Michael’s wife)
(914) 478-5180

Michael’s Public Relations firm contact:
Mike Black
Editorial Director
Acanthus Publishing
The Ictus Group, LLC.
508-847-3227
617-230-2167
mike@ictusinitiative.com
http://www.ictusinitiative.com/

Elise Kindelman
12526 High Bluff Drive, Suite 300
San Diego, California 92130
Telephone: 858-442-3310
Fax: 858-792-3413
elise@elisekindelan.com
http://www.elisekindelan.com/