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Making it Easier to Let Go of Valuable Art

Bigstock-Couple-running-bookshop-13904324What if it's time to arrange your affairs, but you're not quite ready to part with your art collection? You can part with your art works on a part-time basis and still get the same tax benefits you receive from giving a donation to a nonprofit.
Barron's recent article, "The Benefits of Owning Art Part-Time," explains that you can make this happen by gifting a "fractional interest" in your artwork to a museum or charity of your choice. So you'll be sharing ownership of your painting with a worthwhile nonprofit.
If you were to donate 50% of a painting worth $2 million to your local art museum for their fall and winter exhibits, the IRS would permit you to bring the work back to your home and enjoy it during the spring and summer and still claim a tax deduction of $1 million, or one-half of the artwork's market value.
You can't cut a painting in half, but sometimes clients want to gift the piece and still keep it for a while longer before they give it away altogether.
You should create and sign a detailed document outlining the gifting agreement. The document needs to carefully address several issues, such as the time frames each party will use the artwork, the party responsible for its maintenance when it's out of the original owner's control, the party responsible for insuring the art, and any specific uses for the art while under a party's control. You should also note any restrictions on the new co-owners loaning out the artwork to third parties when it's in their possession.
The IRS says the artwork must be gifted in entirety no later than 10 years after the agreement was signed. In our example, your remaining 50% has to be gifted to either the same museum or another charity within 10 years. If you fail to do so, your deduction on the initial gift becomes income. In Year One, you received a $1 million deduction; however, in Year 10, you can't go back and amend those taxes. As a result, it shows as $1 million in income. But once you make a gift of the remaining half, you receive a second tax deduction of $1 million.
A smaller local museum or charity nearby make great partners for this sort of shared-ownership arrangement, as they're apt to be more creative when crafting the agreement. Another worthwhile recipient might be the art school of a local university, charities working to advance appreciation for the arts, and medical facilities with their own art centers.
Reference: Barron's (May 17, 2016) "The Benefits of Owning Art Part-Time"

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Estate Planning for Art

Bigstock-HONG-KONG--FEBRUARY------83058059The more valuable an art collection gets, the tougher it is to create an estate plan for it. If you are not careful, your heirs might end up with a tax bill that they cannot afford to pay.

Children do not always have the same interests as their parents. A collection that the parents love is often something that their children have little or no interest in. Most of the time this creates few issues. If, for example, the parents collect old issues of National Geographic, the children can easily dispose of them after the parents pass away without consequence.

However, an art collection is different because works of art can be extremely valuable.

As the New York Times points out in "Estate Planning Can Get Tricky When Art Is Concerned," art collections require very careful estate planning. The biggest issue is that art is illiquid. If the estate tax is due, then the heirs have to come up with cash to pay it. This requires them to use other estate assets or to sell the art.

Unfortunately, it is not always quick or easy to sell art, and heirs who have little interest in art are often taken advantage of by professional dealers. The good news is that tax authorities will often accept low values for art collections as the true market value is difficult to assess.

If you have an art collection, it is extremely important that you have an estate plan for it. The last thing you want to do is just leave it to your heirs to figure it out. Contact an experienced estate planning attorney to navigate these waters.

For more information about estate planning, please visit my estate planning website.

Reference: New York Times (October 1, 2015) "Estate Planning Can Get Tricky When Art Is Concerned."

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Fractional Art Ownership and the Estate Tax

OV26AOMUMIA recent Fifth Circuit Court of Appeals ruling has potentially profound implications for how the IRS values and applies the estate tax when the estate owns only a fractional interest in a piece of art.

Art collections have been known to cause extreme estate tax headaches. These collections can be very valuable and subject an estate to large tax bills. Because art is not a liquid asset, paying the estate tax requires either finding the money elsewhere in the estate or selling the art itself.

To complicate matters, valuable pieces of art that have been passed down for generations are often owned by multiple family members, with each owning a fractional interest in the art. This makes it even more difficult to handle estate tax issues.

If an estate owns only 10% of a piece of art, it can be difficult to find a buyer for the estate's ownership interest because potential buyers will rightly be concerned about having a say in how the piece will be handled.

Despite the difficulty of finding a buyer willing to pay full price for only a fractional ownership stake in artwork, the IRS has traditionally refused to give valuation discounts for estate tax purposes for fractional art ownership.

However, as reported by Artnet News in "Art Law on Estate Tax on Inherited Collection," the Tax Court and the Fifth Circuit Court of Appeals have overruled the IRS' position and ruled that a valuation discount is appropriate. The exact amount of that discount is currently not known, but it seems likely that new rules and regulations will need to be drafted and litigated.

For more information about estate planning, please visit my estate planning website.

Reference: Artnet News (August 22, 2015) "Art Law on Estate Tax on Inherited Collection

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