financial assets

If you’re an art collector, it’s critical for your estate plan to address your collection separately from other types of assets. Investments in artwork may be motivated in part by potential financial gain, but for most collectors the primary motivation is a passion for the art itself.

As a result, managing these assets involves issues that aren’t presented by purely financial assets. Naturally, you’ll want to preserve the value of your collection and avoid unnecessary taxes, but you’ll also be keenly interested in how your collection will be managed and displayed after you’re gone.

Know the collection’s value

It’s vital to have your collection appraised by a professional at least every three years, if not annually. Regular appraisals give you an idea of how the collection is growing in value and help you anticipate tax consequences down the road. Also, most art donations, gifts or bequests require a “qualified appraisal” by a “qualified appraiser” for tax purposes.

It’s also important to catalog and photograph your collection and gather all appraisals, bills of sale, insurance policies and other provenance documents. These items will be necessary for the recipient or recipients to carry out your wishes.

Review your options

Generally, there are three options for handling your art collection in your estate plan: Sell it, bequeath it to your loved ones, or donate it to a museum or charity.

If you opt to sell, keep in mind that capital gains on artwork and other “collectibles” are currently taxed at a top rate of 28%, compared to a top rate of 20% for most other types of assets. Rather than selling the collection during your lifetime, it may be preferable to include it in your estate to potentially take advantage of the stepped-up basis, which allows your heirs to reduce or even eliminate the 28% tax.

If you prefer to keep your collection in the family, you may opt to leave it to your heirs. You could make specific bequests of individual artworks to various family members, but there are no guarantees that the recipients will keep the pieces and treat them properly. A better approach may be to leave the collection to a trust or other entity — with detailed instructions on its care and handling — and appoint a qualified trustee or manager to oversee maintenance and display of the collection and make sale and purchasing decisions.

Donating your collection can be an effective way to avoid capital gains and estate taxes and to ensure that your collection becomes part of your legacy. It also entitles you or your estate to claim a charitable tax deduction.

Before bequeathing your collection to loved ones or donating it to charity, discuss your plans with the intended recipients. If your family isn’t interested in receiving or managing your collection or if your charitable beneficiary has no use for it, it’s best to learn of this during your lifetime so you have an opportunity to make alternative arrangements. Contact us with questions.

You may view your will as the centerpiece of your estate plan. But other documents can complement it. For example, if you haven’t already done so, consider writing a letter of instruction.

Elements of the letter

A letter of instruction is an informal document providing your loved ones with vital information about personal and financial matters to be addressed after your death. Bear in mind that the letter, unlike a valid will, isn’t legally binding. But its informal nature allows you to easily revise it whenever you see fit.

What should be included in the letter? It will vary, depending on your personal circumstances, but here are some common elements:

Documents and financial assets. Start by stating the location of your will. Then list the location of other important documents, such as powers of attorney, trusts, living wills and health care directives. Also, provide information on birth certificates, Social Security benefits, marriage licenses and, if any, divorce documents.

Next, create an inventory of all your assets, their location, account numbers and relevant contact information. This may include, but isn’t necessarily limited to, items such as bank accounts; investment accounts; retirement plans and IRAs; health insurance plans; business insurance; life and disability income insurance; and records of Social Security and veterans’ benefits.

And don’t forget about liabilities as well. Provide information on mortgages, debts and other obligations your family should be aware of.

Funeral and burial arrangements. A letter of instruction typically includes details regarding your funeral and burial arrangements. If you prefer to be cremated rather than buried, make that clear. In addition, details can include whom you’d like to preside over the service, the setting and even music selections.

List the people you want to be notified when you pass away and include their contact information. Finally, write down your wishes for specific charities where loved ones and others can make donations in your memory.

Digital information. As many of your accounts likely have been transitioned to digital formats, including bank accounts, securities and retirement plans, it’s important that you recognize this change in your letter of instruction or update a previously written letter.

Personal items. It’s not unusual for family members to quarrel over personal effects that you don’t specifically designate in your will. Your letter can spell out who will receive items that may have little or no monetary value, but plenty of sentimental value.

Final thoughts

A letter of instruction can offer peace of mind to your family members during a time of emotional turmoil. It can be difficult to think about writing such a letter — no one likes to contemplate his or her own death. But once you get started, you may find that most of the letter “writes itself.”

Tag Archives: financial assets

Estate planning and your art collection

Put pen to paper: How a letter of instruction can benefit family harmony