By John J. Pankauski
Americans' love for wine has exploded! Wine consumption and collection have risen to new heights in the last 10 to 15 years. People flock to visit wineries and vineyards in Napa Valley, bid on lots at auctions, read more about wine through wine magazines and books, attend tastings, bike through the French countryside on wine tours, store wine at home in wine cellars, go to great lengths to get a bottle of that hard-to-find "cult" wine and search wine stores for that 90-rated new release. Successful retired executives, doctors and lawyers that previously had a love only for drinking wine are starting their own vineyards. Tech millionaires are buying wineries and spending millions at auctions to purchase rare and fine wines.
More new wineries are being created than ever before. Existing wineries are expanding-buying more land, planting new grapes, growing more of the favorites, creating wine clubs and mailing lists for the faithful and spending millions on new and innovative machinery and processes to improve the art of winemaking. Some wineries are going public.
Perhaps the roaring bull market or general overall prosperity has fueled this increasing love affair with wine. Regardless of what has sparked the interest in wine, there are no indications that it will slow down. In fact, the number of wineries has exploded, and the number of varietals and acres planted has likewise increased greatly just in the last 10 years. Americans love their wine, search their favorites out diligently and are taking an unprecedented interest in this drink, its industry and its processes.
It is not uncommon for a fiduciary to encounter wine in an estate or trust. In fact, when dealing with a wealthy client or one with an affinity for art, collectibles or fine dining, a fiduciary should inquire about the existence of wine collections. Estate planners will be required to assist clients with planning for these unique assets and will be required to deal with them in estates and trusts. The oddities of wine and the values that wine can garner require that fiduciaries know how to deal with such a unique asset. This article provides the reader with a general overview of some issues to look for when wine is found in the hands of a fiduciary.
Marshalling the Assets: Knowing Where to Look for the Collection
A fiduciary's role includes marshalling the assets of an estate. This duty is particularly important for wine collections. A fiduciary needs to know how to ascertain the extent of the collection, where to look for the wine and what to look for in a fine wine.
How does the fiduciary know if there is a wine collection, and how does the fiduciary ascertain the extent of the collection? The first place to look is in a home cellar. Contemporary, stylish wine cellars with skillfully made wooden racks, tasting tables and countertops can occupy what used to be a 50 square foot closet or an entire wing of a residence. Rather than cellars, they are actually carefully planned and built wine rooms that are meant to store the collection in a temperature--and humidity--controlled environment.
In older homes, particularly in the Northeast, old, basement-type wine cellars are often found. Going "down cellar," as New Englanders say, can reveal a filthy, stone-laid room full of boxes, old wooden shelves and what may first appear to be worthless, dusty bottles, cases or crates. These old cellars are often located in a corner of the basement and are frequently not temperature- or humidity-controlled. If a person is a collector, there is a good chance something may be stored in the basement. Pushing past the washer and dryer, beyond the mementos and boxes, the fiduciary may discover that the dusty old case from 1959, which may appear, on first impression, to be too old and filthy to be valuable, is a case of Lafitte Rothschild worth $8,000.
Smaller wine cellars, too, are gaining popularity. These stylish units are small to industrial-sized refrigerators capable of holding 100 to 500 bottles of wine. These units can appear to be armoires or entertainment centers. Although many have glass doors that reveal the collection, other units have a hardwood and furniture finish exterior hiding the wine inside from immediate view. Such units may be found in the garage of the house or in the living room of a small condo.
Extent of the Collection
Finding a wine cellar, regardless of the size, should be easy, but ascertaining the extent of the collection is a greater challenge. If the collector is active, there may be outstanding orders for future shipments, new releases or wine club distributions. Part of the collection may also be stored out of the residence. Most American wine producers do not sell futures, but some California wineries do. Futures are the right--and typically in the wine context, the obligation--to buy a predetermined amount of wine from a particular producer at a particular price when the wine is released. Because there is a worldwide demand for what many perceive to be the finest red wine--first growth Bordeaux-collectors, attempting to ensure they will receive some of the release, often will purchase futures and wait for the release of the wine. The collector may be storing the futures for his or her personal collection, to be consumed in the future, when the wine is expected to be most drinkable; or the collector may be purchasing it as an investment with an intention to sell it later at auction. If the decedent loved Bordeaux, for example, and had a case from a particular chateau for successive years, most likely the decedent bought futures on a regular basis. Accordingly, the fiduciary should inquire whether the collector purchased futures, to what extent they have been paid for and when shipment is expected.
Prerelease programs and wine clubs are common among California wine producers. Prerelease programs are for consumers that wish to receive a producer's newest wines before the general public does. Often the wines are ordered in advance and shipped to the consumer after bottling and storage. Merely being eligible to receive some winery's new wines--even just a bottle or two--can be enviable. Many wineries have mailing lists and wine clubs that send members regular shipments of new wines, "library" or cellared wines, limited release or limited production "reserve" wines, promotions and perhaps wine club discounts. The small production, high-quality, high-demand wineries, such as the so-called "California cults," have waiting lists to get on their mailing lists. These wine producers have such strong demand that they estimate it will take a year or two before a new customer can be eligible to buy wine from that producer. Often the availability of wine from such mailing lists or clubs is limited and restricted by production and the length of time the customer has been on the list.
Letters, faxes and e-mails about wine shipments, invoices for futures, cancelled checks to wineries and credit card bills all suggest that the collector may have been receiving wines on a regular basis. The fiduciary should look for shipments that have been paid for, inquire about expected delivery, store them properly when they arrive and consider how to value them before distribution. Knowing when wine is being delivered and where to store it is critical. A shipment of wine that is released in the spring or summer and sits in a hot, steamy warehouse awaiting pickup, or one that is dropped off by a shipping company on a sun-drenched porch of the collector's house, could be ruined.
Invoices, correspondence or bills may reveal that the collector has wine off-site, away from the rest of the collection. There may be wine stored in area storage facilities, at wine shops or on consignment to auction houses. Efforts to learn of these arrangements should be considered, including paying outstanding bills, which will be claims against an estate. Finally, insurance applications, policies and correspondence should be examined. If the collector had insured the wine, the policy will provide the fiduciary with an idea of the extent of the collection, its value and perhaps its locations. In short, the fiduciary may find more wine than just what is stored in a collector's house.
Storing and Insuring the Collection
A fiduciary should take steps to store the wine properly. Generally, the most ideal storage is in a secure facility that caters to wine storage with the temperature maintained at somewhere around 57º-59º Fahrenheit in a humidity-controlled environment. The selection of the storage facility is particularly important for the sale of a collection, because auction houses and collectors will inquire as to how the wine has been stored.
The duration of storage is also an issue. If an estate is a large one that is expected to be open for more than a year, the fiduciary should attempt to find proper storage as soon as possible and plan to keep the wine there until sold or distributed. Such expenses should be fully deductible as expenses of administration. If the estate is one that is not expected to be open very long or that will allow for easy or early distribution of assets, keeping the wine in the collector's home may suffice. An exception to this rule would be if the home has excessive heat or fluctuating temperatures, or if the collection includes older or very valuable wines that would demand more attention and better storage.
Whether the fiduciary should insure the collection, or has a duty to do so, is an open question. Often, fiduciaries will insure other valuables within an estate or trust. Wine collections may or may not be covered by the decedent's homeowner's policy. It would seem prudent to review any policies to see if wine is covered. If wine is not already covered, adding it to the homeowner's policy or purchasing another policy would be appropriate. The fiduciary should also consider coverage for power failure. If wine is stored off-site, the fiduciary should inquire whether the storage facility has a generator for power failures and what, if any, insurance the storage facility provides.
Looking for High Maintenance Wines
Wine is a unique and high maintenance asset. It requires attention, proper storage, knowledge of the collection and considerations of whether to retain or dispose of it. Certain types require even greater attention. Should the fiduciary sell the wine immediately upon discovering its existence? Or should the fiduciary retain the wine, believing it will in-crease in value?
There are important timing issues with wine collections. Not all wines are the same. Wines that are believed to be at or approaching their peak of drinkability (and therefore of value) should be disposed of sooner rather than later. Younger wines or those that may benefit from cellaring do not require immediate action such as consignment or auction. Because dessert wines and ports often can age for decades, proper storage becomes a major concern.
There is a common misconception among some that all wines improve with age. In fact, most wine--by some estimates 90-95%--is ready to drink on release. Many wines reach their peak of drinkability within the first two to three years. Although some Bordeaux and cabernet sauvignons can last 20 to 25 years, improving along the way, most wines cannot. Wines such as zinfandels, chardonnays, pinot noirs and sauvignon blancs typically become most drinkable over a much shorter period of time-three to nine years, depending on the grape, the year and the producer. Once wines have reached their "peak," their drinkability and value will start to decline.
For most fiduciaries, retaining expert advice and counsel is vitally important when dealing with wine. If the wine collection is significant, a fiduciary should take steps right away to retain an expert, probably an auction house. A wine collection can become a wine concentration, from which the fiduciary may be obligated to diversify under state law principles of the prudent investor rule.
Administering the Collection
Once a fiduciary has attempted to learn the extent of the collection, searched for bottles and cases, considered the existence of ordered but unshipped wine, and arranged for proper storage, the fiduciary should then take steps to inventory the wine, ascertain its value and decide whether to sell or cellar particular wines. In any event, the fiduciary should be aware of value issues surrounding wine collections.
For estate tax purposes, it will almost always be necessary to retain an appraiser and have the collection appraised. The fiduciary and the appraiser should be aware of the blockage discount concept, which can be applicable to art and blocks of stock and which should be available to wine. When valuing wine, a discount may be attributable to multiple cases, or perhaps bottles, of the same wine or even to an entire collection. Such a discount is the result of placing a number of the same or similar assets on the market simultaneously. The blockage theory states that such a surge on the market will depress the price. See Treas. Reg. §§ 20.2031-2(e) and 25.2512-2(e). It is unlikely that the markets for wine will support the same value for a number of the same wines.
The concept of the blockage discount is well known in the probate world, but its applicability is readily seen in the wine world. Multiple cases of the same wine sold at the same auction often do not sell for the same amount and in fact can vary by as much as 10-20%. Likewise, values for the same wine can vary at different auctions within the same year or even month.
Other factors to consider when valuing wine demonstrate why wine is an "illiquid liquid asset" and why other discounts may be warranted. Like other unique assets, wine has no immediate market. Although wine can be sold to the local collector or wine merchant or advertised in the classifieds of a wine publication, most collectors auction their wine.
Demand for and prices of the best wines seem to be heading skyward. In June 2000, the Napa Valley Wine Auction, a charitable event, saw bidders spend $9.5 million-a staggering amount for a weekend auction. Among the wines sold was a six liter bottle of 1992 Screaming Eagle, which sold for $500,000. Two bidders each spent over $1 million at the auction. Napa Valley's Happy Days, Wine Spectator, Aug. 31, 2000, at 109-11. Auction houses such as Morrel and Company, Christie's, Butterfields and Sotheby's sell wine in cities such as New York, London, San Francisco, Los Angeles and Chicago, where bidders will buy anywhere from $500,000 to $2 million worth of wine over a one or two day period. Auctions are also taking to the Internet, which is becoming an increasingly popular venue in which to purchase rare and fine wine.
Auctions are frequently held by major auction houses, such as Christie's and Sotheby's, typically in partnership with a local wine distributor. One advantage to this method of sale is that the wine is virtually guaranteed to be stored properly. In addition, these professionals' expert advice and their knowledge of previous sales and current trends will be invaluable in seeking the highest price for the wine. When dealing with a local merchant or auction house, the fiduciary should ensure that the wine will be stored properly. Most auctions are held in the spring and fall months, although the Internet auction houses will probably hold them more frequently. Wine Spectator magazine tracks recent auction highlights and auctions planned for the coming month or two and includes an auction index.
Wine is subject to the whims of the market. Fiduciaries need to show caution and foresight when dealing with wine, so that the most appropriate venue for the sale of the wine is obtained and wine is not inadvertently "dumped" in the short run. Most auctions are planned months in advance of the actual sale, because careful planning is required to bring collections to auction. A fiduciary does not want to have to look to the wine collection as a means of fulfilling a liquidity need. A quick decision to sell without considering venue and timing can diminish the sale proceeds.
Much like artwork and other collectibles, the value of wine is influenced by the ups and downs of the market, the economy, changing tastes and times. California cult wines currently are in great demand and are selling for record-shattering prices at auction. French Burgundies and Bordeaux remain high in demand compared to wines from the Languedoc region. Vineyards are expanding, planting new vines and hoping to bring new wines to market. In California, particularly the Santa Barbara region, there has been an increased emphasis by some winemakers on Syrah (Sirah) and other Rhone varietals, in addition to such American favorites as chardonnay and cabernet sauvignon. Much aged port, drinkable now, can be bought at auction for less than what newly released port sells for, which still requires years more to age. Who is to say what will be the next California cult?
A number of local and national wine merchants are knowledgeable and ethical. They can provide the fiduciary with great insight on the collection and will probably offer to purchase some or all of the wine or to sell it to other collectors. Many of these merchants are in large cities, and often they will advertise in the classifieds of Wine Spectator. Fiduciaries can also find a number of them by conducting an Internet search with such search terms as "wine," "rare" and "fine."
For larger or more expensive collections, the national or international auction is the place to obtain the most visibility and potential number of buyers and the greatest amount of expertise and experience with handling collections. A fiduciary should consult with more than one auction house and discuss issues of timing of the sale, shipment, storage, expenses, valuation and venue. These experts can help the fiduciary decide, for example, in which auctions the fiduciary should have the collection sold. For example, the expert may advise that Bordeaux and vintage ports will sell better in London than in New York and that California cult wines will likely receive the most interest at a planned auction featuring only California wines.
If wine is to be distributed outright to beneficiaries, fiduciaries must take a few points into consideration. As mentioned, proper storage and shipment are essential. Whether storage and shipment of that wine is a proper administration expense or should be borne instead by the recipient beneficiary is a matter of the governing document and state law. If, in the case of a bequest, the fiduciary knows who will be receiving the collection, the fiduciary should discuss the handling, storage and shipping of the collection with the recipient.
Whether wine is a collectible or merely tangible personal property should depend on how the controlling document is worded, along with state law. Care is needed, for example, if all other collectibles and artwork were left to one beneficiary and tangible personal property was left to another.
Wine is a high maintenance, illiquid liquid asset that is difficult to value. Most fiduciaries cannot be expected to know the intricacies of a wine collection and should retain expert advice on the appraisal and handling of wine collections. They should be diligent in knowing where to look for the wine and how to ascertain the extent of the collection, and they should be eager to have the fine wine inventoried and stored properly. As Americans' love for wine continues to grow and expand, it will be more common for fiduciaries to encounter wine collections in estates and trusts. Knowing what to look for and the issues to address with wine collections will aid the fiduciary in the proper administration of trusts and estates.
John J. Pankauski is a Senior Vice President of Bank of America Private Bank in Palm Beach, Florida.