Stamps, figurines, movie posters: Lots of people collect these items, and their heirs find it easy enough after the collectors pass away to put them back into circulation. But what if your eye tends to more unusual objects? Do you have a plan for the 11,000 bottles of hot sauce in your basement, or the 105 bagpipes the neighbors love to hear you play? How about your small but exquisite collection of incunabula?
The collector's vision is an idiosyncratic one, which is exactly why their collections are so unique and memorable. But they can also be difficult to put a price on, and can be subject to surprisingly high taxation when they are. To ease the burden on their beneficiaries, and to make sure a beloved collection is handled in keeping with their wishes, collectors should include it in their estate plan.
Steps to Take to Include Your Collection in Your Estate Plan
If you have a rare or unusual collection, whether it's fine art, thoroughbred horses, or Disney pins, you need to ensure that it's properly accounted for before you pass away. The most failsafe way of doing this is to include your collection in your estate plan.
Working with the Right Appraiser
The first thing to do is have your collection appraised. Appraisals help your executor, trustee, and family members decide the value of a collection. But don't just go to any old shop for your appraisal: look around to find a qualified appraiser with expertise in the type of items you've collected. If you're looking to determine the value of your Fabergé Egg collection, for instance, you don't want to hire an appraiser who specializes in rare coins or foreign flags.
Additionally, if the suspected value of a collection exceeds $3,000 for each piece, or $10,000 total, the IRS requires an appraisal before the collection can be included in an estate plan. Moreover, individual items in the collection with a claimed value of $50,000 or more must be referred to the IRS' Art Appraisal Services (AAS) and reviewed by the Art Advisory Panel. The AAS works with the IRS to evaluate the items so that their claimed fair market value can be verified. This prevents valuation issues from cropping up after the collector dies.
Organizing Your Documents
It is important to make sure you have all the relevant documentation for each piece in your collection, including the catalog description for objects you bought at auction, appraisals, photographs, bills of sale, and insurance policies. Without these items, it will be difficult for your estate planning attorney to place the collection into the estate plan accurately.
Consider Who Will Receive What
The best way to determine how to account for your collection in your estate plan is to discuss it with your family members and loved ones. Having frank conversations about the items in the collection will help you get an idea of who wants what.
Nothing is worse than giving a piece of your treasured collection to a beneficiary and having them sell it immediately because it was not something they wanted. It's much easier to offer the collection, or pieces of it, to the beneficiaries who might also cherish it as you did.
Hire an Estate Planner
Estate planning attorneys understand how important your collection is, not just to your overall investment portfolio but to you personally. There was a reason you started spending your money on these items in the first place. A skilled estate attorney will help you determine the best way to pass the collection on to your beneficiaries.
Donating Your Collection
Many individuals choose to donate their collection to a museum or charitable organization. For example, Heiner Pietzsch, a famous art collector, donated several pieces of his highly valued art collection to different museums and localities when he passed away.
If you plan to donate your collection to a museum, library, school, or other institution, reach out to the organization prior to putting that stipulation into your estate plan to ensure they have the capacity to care for it. If they don't, you should work out an alternative disposition plan for the collection.
Conditions for Inheritances
It is not uncommon for beneficiaries to sell collections they've inherited. If you believe your beneficiaries are likely to sell yours, you can either do it yourself and put the money into your estate, or make stipulations for the length of time the beneficiaries should hold onto the collection. You can also require your beneficiaries to hold onto your collection and pass it down to their children or heirs.
If you choose to sell your collection while you're still alive, you'll want to inquire about the tax implications. The IRS classifies many objects as alternative investments, including “works of art, rugs, antiques, any metal or gem, with exceptions, any stamp or coin, with exceptions, valuable alcoholic beverages or any other tangible personal property.”
When you sell items from your collection during your lifetime, you're subject to a long-term capital gains tax rate of up to 28% if you've had them for more than one year. If you've had them for less than a year, they will be subject to an ordinary income tax rate. On the other hand, if the items are accounted for in your estate plan and properly gifted to a beneficiary, they will not be subject to any income tax—unless that beneficiary decides to sell them later.
For instance, Lily Safra, a major art collector and billionaire, chose to sell off much of her collection while she was still alive and then put the money into her estate or donate it to charity. Artworks she had owned for more than a year were taxed up to 28% when she sold them. If she had chosen to bequeath the artworks in her estate plan instead, she would have avoided these fees.
Things to Consider When Drafting an Estate Plan
As you create your estate plan, you'll need to be clear about the current ownership status of your collection. Are you its sole owner, or do you have joint ownership? You'll also want to consider how the collection will be kept: Will you create a trust for it? If so, what kind of trust will work best?
Jointly Owned Assets
In Michigan, property can be jointly owned in several different ways. For collectors, these are the three most common:
- Joint tenancy: In this type of ownership there are two or more owners, and the property cannot be divided. When one owner dies, the other becomes the collection's the sole owner and completely absorbs the other owner's interest.
- Tenancy by the entirety: This ownership is created when property is given to a married couple at the same time. Neither spouse can sell or transfer their interest in the property without the other's consent.
- Joint tenants with right of survivorship: Here, ownership starts when property is given to two or more people and specifically mentions survivorship rights. When one owner dies, that person's share passes to the remaining owners, with two provisions:
- The remaining owners must live more than 120 hours after their co-owner dies for the survivorship right to take effect.
- If the remaining owners die during that 120-hour window, they lose their interest in the property. This means their beneficiaries will not receive the additional share in the property. The only way this stipulation can be avoided is if a will, deed, title, or state law specifies otherwise, or if it would cause a duplication or failure of the property distribution.
When considering how to assign your collection in your estate plan, you might choose to have it transferred to a trust. Trusts can be used to dispose of real property (buildings, structures, real estate, etc.) and personal property (all other property, whether it is tangible or intangible, including household items and financial securities). There are many benefits to placing your collection, which would fall under “personal property,” into a trust for estate planning, including:
- Establishing rules and requirements that your beneficiaries must meet before inheriting the collection.
- Preserving your collection for minor children if you pass away before they reach the age of majority.
- Potentially reducing estate and gift taxes.
There are four different kinds of trusts: revocable, irrevocable, living, and testamentary. Revocable trusts and living trusts are created while you are still alive and can be altered right up until the moment you pass. Trusts created by you during your lifetime allow your beneficiaries to avoid probate, which can be an expensive and uncomfortably public process.
Trusts can be irrevocable before or after you pass, and once irrevocable, are very difficult to change. Once your assets are moved out of your name and into the trust, it is hard to remove them. A testamentary trust, on the other hand, is one that is created by your will at the time of your death, and thus can only take effect by having the will go through probate court.
Careful Estate Planning Helps Your Beneficiaries Avoid Unnecessary Losses
Any trust can wind up in probate court if they're not set up properly. For instance, when the artist Andy Warhol died, his estate plan stipulated that most of his estate would go towards creating the Andy Warhol Foundation for the Visual Arts. As part of his contract for creating the plan, Warhol agreed that his attorney, Edward Hayes, would be paid 2% of what the estate was worth. After he died, the Foundation alleged that Hayes had vastly overestimated—and collected on—the value of Warhol's estate.
Litigation ensued. Two years later, a New York court determined that the Foundation's appraisal of the art collection was too low and that Hayes was owed much more money than he'd originally received in keeping with his 2% fee. The total cost for the Warhol estate in arriving at this conclusion? A cool $4 million in legal fees.
Such a headache could have been avoided had Warhol worked with a qualified estate planning attorney instead of Hayes, who was a skilled criminal attorney but had no experience with estate planning. Adding insult to injury, Warhol's Foundation has been sued several times over the years for copyright infringement and mismanagement of the collection.
How Great Lakes Family Probate and Estates Can Help
At Great Lakes Family Probate and Estates PLLC, team members will work diligently to create an estate plan that fully protects the collection you've worked so hard to build. GLFPE understands the special circumstances that come with rare or unusual collections, and will be able to advise on administering them to your—and your beneficiaries—best advantage.
Call GLFPE today at 888-554-5373 or schedule a consultation online to create your estate plan that meets your unique needs.