Art and Estate Planning*

By Julie Lackner

As an artist, you’ve spent a lifetime not only creating, but collecting, art.  What’s going to happen to it all after you are gone?  You may have accumulated a large collection of art, and better yet, that collection might be worth a lot of money.  What’s the best way to pass on all that value to the next generation of owners? This is where a good estate planning attorney will be helpful.

The main thing to consider is whether to give away some of the art during your life or to give it away through your will after you’ve passed away.  The tax treatment to the recipient of the gift is different in each option.  If you give away a piece of art during your life, the person who receives the piece will have the same basis as you.  Basis is a tax term, and it means the cost that was paid for the piece originally.  For example, say you bought a piece by Takashi Murakami before anyone knew who he was.  You paid $10,000 for the piece.  Today, imagine the piece is worth $1,000,000.  You decide to give it away as a gift to your child, Joe.  Joe is not much of an art collector, and he decides that he wants to sell the piece.  When he sells it, he will step into your shoes for tax purposes and take your basis.  That means he will pay capital gains on the entire gain on the sale.  He’ll pay tax on $1,000,000 – $10,000, which is $990,000.  At a 15% capital gains tax rate, Joe will pay $148,500 to Uncle Sam.  Once you account for the tax Joe has to pay, you’ve only given him a gift worth approximately $850,000.  Note that if you give a gift while you are still alive, you may need to file a gift tax return and pay a gift tax.  You can give away cash or property worth up to $13,000 in 2010 to as many people as you like without having to file a gift tax return with the IRS and without having to pay any gift tax.  Over your lifetime, you can give away up to $1,000,000 before you have to pay any gift tax at all.

What happens if you die next year and you leave Joe the piece in your will instead?  You may have to pay some estate taxes on it, but Joe will get what’s called a “step-up” in basis.  That means that his basis for tax purposes will be whatever the property was worth on the day you died.  So if the piece is worth $1,000,000 on the date of your death and Joe turns around and sells it for $1,000,000, he will have no gain on the sale.  No gain means no tax, and Joe gets to keep the entire $1,000,000.  In fact, he may even get to take a loss for any commissions he has to pay when he sells the art!  Passing on art at death can be accomplished either through a will or a estate planning trust.

In addition to deciding whether you want to give away your art during life or at death, you’ll need to decide who will receive it.  As in the above example, you could give it away to a family member, but you don’t have to.  You could decide instead that you want to give your entire collection to a museum.  If the museum is a qualified charity, then no taxes will be due on the transfer and you could even get a charitable deduction.

As a final thought, it’s generally best to pass on highly appreciated assets at your death, rather than giving them away during your life.  None of the appreciation gets taxed so the recipients will get a lot more bang for their buck, and they should thank you for that.

*The material contained above has been prepared by Bacon Wilson, P.C. for informational purposes only and is not intended and should not be construed as legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Internet subscribers and online readers should not act upon this information without seeking professional counsel.