Protecting Your Heirs and Your Legacy

Like many collectors, you may not think of your collection in purely financial terms. But when it comes to estate and charitable planning, a valued collection is also a financial asset requiring the same careful consideration as any other financial asset. For many families, in fact, collections can represent a significant portion of their total net worth.

“Some collectors don’t feel comfortable acknowledging the financial nature of their collections,” says Peter May, a Calibre Financial and Estate Planning Director. “They may not even mention tangible personal property when disclosing assets.”

Without careful planning, however, the fate of your collection will be uncertain. “It may have to be sold—at a steep discount—to pay estate taxes,” says Calibre Charitable Giving Specialist Andrea Lawrence. That’s because the default option for disposing of such assets is often the auction house, a route that virtually guarantees a loss of up to 70% of a collection’s value.

Creating a Succession Plan

Collectors face unique challenges when making decisions about the succession of their collections.  Whereas most “financial” assets—such as stocks, bonds, and other investments—are easily distributed among heirs, a single painting or sculpture is more difficult to share.  As a result, it’s never too early to begin thinking about a succession plan for your collectibles.

In many cases, it is appropriate to consult a third-party advisor with focused expertise in succession and philanthropic planning for collections. A third party advisor will work with your financial advisor and provide valuable insights into your goals and objectives.

“A financial-based strategy will make it possible for you and your heirs to realize the full potential of your collection from both a philanthropic and a financial perspective,” says Michael Mendelsohn, collector and founding partner of art and philanthropic advisory service BRIDDGE Strategies for Art, Heirs & Philanthropy.  Determining which opportunities are most appropriate for specific parts of the collection will depend on your family’s values, goals and stage of life.

Few collectors are aware of their strategic options.  The all-too-common ’empty hook’ strategy—simply not accounting for an important painting so your daughter can whisk it away at the time of your death to avoid estate taxes—shouldn’t be one of them.  In similar fashion, undervaluing collections for insurance and tax purposes will inevitably cause problems for future generations.

Financial-Based Strategies

Gifts to heirs can offer substantial tax savings during your lifetime. Still, gifts are also irrevocable and therefore shouldn’t be undertaken until your own plans and your family’s circumstances have become more settled—and that usually occurs much later in life.

Another option is to structure a fractional gift—essentially, a means of sharing ownership of a portion of your collection with a museum during a designated time period each year.  This approach enables you to enjoy proprietorship of the gifted item as well as substantial tax savings. If you are typically away from your principal residence for a certain period of time each year, a fractional gift can be an ideal way to insure that an important item in your collection is well cared-for during your absence.

If you are nearing retirement, you may want to consider the advantages of gifting or even selling the “bottom,” or least valuable parts of your collection.  The cash generated by a sale can be dedicated to inter-family gifts during your lifetime, enabling you to move assets out of your taxable estate.

Establishing a Legacy

Donating your entire collection to a museum is no longer the most effective way to ensure your legacy.  Because museums now frequently object to restricted covenants, it can be more difficult to place your entire collection with a single institution.

When a museum is interested in only a portion of your collection, one option is to gift select pieces, and create a Charitable Remainder Trust, or CRT, for the rest of the collection.  The CRT can sell pieces from the collection when appropriate, providing you with both extra income and tax benefits.

A second option is to establish a private operating foundation with endowment funds that can be managed into the future. Although your collection would be housed with host institutions, the private operating foundation would retain proprietary and management responsibilities.

This scenario places control of your collection and your legacy in the hands of trustees—you, your children and other individuals you designate—who can hire a dedicated curator and make decisions on important matters such as a touring schedule and terms of access for researchers.  Perhaps most importantly, your collection, as you have shaped it, can be shared with the largest possible audience.

The Rewards of Planning

Developing and implementing a succession plan for your collection may take months, and implementing it could take years.  Nevertheless, the pleasure of finalizing your wishes during your lifetime, even though they may not be fully carried out until after your death, shouldn’t be undervalued. Careful planning can ensure that your artistic vision will survive for generations.

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