March 01, 2017

Practical Planning for Art Collectors and Their Advisors, Part 1: The Ancillaries

Ramsay H. Slugg

Art is an asset of passion. Coupled with its unique financial characteristics, this makes art perhaps the most difficult asset to incorporate into an overall estate and financial plan.

This is the first of a two-part article based on the author’s book, Handbook of Practical Planning for Art Collectors and Their Advisors. Part 1 focuses on “The Ancillaries,” those matters that the serious collector should take into consideration regardless of the ultimate disposition of the collection. Part 2 will focus on planning for the ultimate disposition of the collection. Although this article focuses on art, most of the discussion applies to the broader world of collectibles, including coins, stamps, antiques, and collectible firearms.

For many collectors, not only is their art among the most valuable assets that they own, but also they are more passionate about it than they are about their stocks, bonds, real estate, and sometimes even the family business. They have spent considerable time, energy, and resources to develop their own art expertise and have built a collection according to their personal aesthetic tastes. Collecting art is far more than a weekend hobby or merely an activity of home decoration; collecting has become a passion.

Although collectors probably realize that there will be some sort of disposition of their art, they most often are focused on the passion of collecting, not disposing. When they do consider the ultimate disposition of their collection, they are often overwhelmed by the seemingly endless number of choices of what to do. When faced with so many perceived choices, human nature takes over and often results in the selection of the default planning option—doing nothing. And often, a collector’s advisor is not aware of the extent or value of his client’s collection, and planning consists of a simple, standard bequest of tangible personal property to the surviving spouse, or the children or other heirs, to divvy up as they agree.

The failure to plan for the disposition of such collections can be costly on many fronts. In addition to federal income, estate, and gift tax considerations, the failure to plan means that the collection will end up with the estate’s personal representative, who often has little expertise in art and little, if any, direction for an appropriate disposition. These considerations may result in a grossly inequitable distribution of estate assets, perhaps to family members who do not share the collector’s passion, or an estate fire sale. The failure to plan most certainly will result in family discord and perhaps litigation. Finally, the failure to plan most assuredly will lead to a disposition different from what the collector would have wanted if he had taken the time to properly plan.

Part 2 of this article will focus on those planning options. At least four important matters, however—risk management, valuation, provenance, and liquidity—need to be addressed, regardless of the planning outcome.

Risk Management

For most, the decorative art and other collectibles they have around the house likely are adequately covered by their homeowners insurance policies. But a significant collection calls for a more robust solution.

Risk management is first and foremost about putting into place safeguards to prevent damage to a collection. Preventing a claim for replacement or repair is preferable to filing a claim after the damage occurs.

Collectors should have a good grasp of the value of their collections and then engage an insurance specialist to determine the appropriate level and type of insurance needed. This can be as simple as coverage under a homeowners insurance policy or additional valuable items coverage that is separately scheduled from the homeowners policy.

For collections of greater value, the collector should engage an insurance professional who specializes in high net worth clients and who is able to provide not only an appropriate insurance policy but also risk-management practices concerning security, fire, and smoke damage prevention.

Accidental damage probably accounts for the highest volume of claims, followed by theft, fire, storm or water damage, and “lost/mysterious disappearance.” The chances of actually experiencing a claim cannot always be controlled, but certainly they can be mitigated by working with a risk-management specialist.

Accidental damage is much more likely to happen if the art is moved from one residence to another or loaned to museums. In these cases, experts again should be used to properly pack, handle, and transport valuable works of art.

The key is taking steps to avoid a claim, which is much more important than focusing on the claims process itself. Taking steps to avoid a claim usually is much broader than imagined and includes proper framing and hanging of artwork, water leak detection, periodic inspection of the collection to detect flaws (especially for installation), and, of course, the more obvious fire, smoke, and theft prevention.

Risk management does not end at home. If any of the art is to be transported to another location or placed into storage, either during life or during estate administration, competent experts should be engaged to properly pack, transport, and store the art.

Who Stole My Art?

Art theft is big business, and most stolen art is never recovered. According to the FBI, only about 5% of stolen art is recovered. So the best course of action is to prevent the theft in the first place, which begins at home with an appropriate security system and safeguards and background checks of household employees and contractors who have access to the art. Security also should extend to any off-site storage facility.

Provenance considerations, discussed below, come into play here, too. If stolen art is recovered, then proof of ownership will be required to reclaim the art.


From a planning point of view, an invaluable side benefit of appropriate risk management is an inventory. If the collector has maintained bills of sale and catalogs of sales from where the art was purchased, he may have an inventory of sorts already. Beyond this, the insurance company covering the collection will require an inventory and even may assist the collector in building a form of inventory if he does not already have one.

For a planner, the inventory becomes a crucial document, helping the collector express the “four Ws”—what goes where, to whom, and when. The inventory also will provide a road map to the eventual estate fiduciary and the preparer of Form 706, Federal Estate Tax Return.

The value and scope of the collection will dictate what form of inventory is appropriate. At a minimum, it should include a description of each piece (including name, if any), artist name, acquisition date, where and from whom it was purchased, purchase price, condition (including any known repairs), and its physical location. This inventory can be expanded as appropriate.

The collector may wish to photograph each piece and assign identification numbers to each, which allows for better organization of the inventory. The inventory also can include details such as measurements and medium. This information helps to identify and authenticate each piece and assists in the risk-management process discussed above. Finally, this information greatly assists if a theft takes place or any questions of provenance arise.


Valuation is critical to the planning process, whether the plan involves selling art, giving art to family members, or donating art to charity, and whether those sales or transfers take place during life or at death. Appraisals are required for any taxable transfers and must be filed with Form 709, Federal Gift Tax Return, or Form 706, Federal Estate Tax Return. Appraisals also are required for charitable transfers when the value of the donation is above $5,000. Finally, appraisals also will be required to support any loans against the collection and will likely be required by insurers. Beyond all of these requirements, a periodic appraisal or valuation of the collection should be considered as a best practice for collectors.

Fair Market Value

The general rule for federal income, estate, and gift tax purposes is that transferred property is to be valued at its fair market value. Fair market value is defined in the Treasury Regulations generally as the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of the relevant facts. Relevant factors to be taken into consideration for determining fair market value include the cost or sales price of the property, sales prices of comparable items, and expert opinions.

In most cases, the cost of the property in the seller’s or transferor’s hands provides the best evidence of value, if the transfer of the property occurs shortly after it was purchased by the transferor. The Tax Court and other courts have followed this principle in a number of cases. For example, in Hunter v. Commissioner, a Tax Court memorandum decision, the taxpayer purchased a collection of prints for approximately one-fourth to one-third of the retail sale price for which it would have been listed and then donated the prints to charity. The taxpayer’s claimed federal income tax charitable deduction at the supposed fair market value was reduced to the taxpayer’s cost. T.C. Memo 1986-308. The same principle has been followed in numerous other valuation cases, most of which involved charitable contribution schemes with no real economic substance, whereby the taxpayer would purchase an item for well under its purported value, hold the item beyond the long-term capital gain holding period, then donate the item for its supposedly higher value. Gems, lithographs, books, art, and other collectibles all have been used in these tax shelter schemes.

On the other side of the transaction, if the property is sold by the transferee shortly after the transfer, the sales price once again may be the best evidence of value. One such example of this is found in Rev. Proc. 65-19, which advises that the sale of a collection at public auction or via classified advertisement within a reasonable period of time after the collector’s death generally will set the value of the collection for estate tax purposes.

More often than not, however, there will not be either a purchase or a sale in close proximity in time to when the collector makes a transfer requiring a valuation. Therefore, most of the time, a collector making a gift to family members or a donation to charity, or a personal estate representative acting on behalf of a deceased collector, will need to obtain an appraisal.

Appraisals and Appraisers

The original guidelines for an appraisal to support the federal income tax charitable deduction for contributions of tangible personal property included the following:

  1. a complete description of the object, including the size, subject matter, medium, name or names of artists, approximate date of creation, and interest transferred;
  2. the cost, date, and manner of acquisition;
  3. a history of the item, including proof of its authenticity;
  4. a photograph of a size and quality sufficient to identify the subject matter fully, preferably a 10-inch-by-12-inch or larger print; and
  5. a statement of the factors on which the appraisal was based, including the following:

a. the facts about the sales of other works by the same artist or artists, particularly on or around the valuation date;

b. quoted prices in dealers’ catalogs of the works by the artist or artists or of other comparable artists;

c. the economic state of the art market at or around the time of valuation, particularly for the particular property being valued;

d. a record of any exhibitions at which the particular art object was displayed; and

e. a statement as to the standing of the artist in the profession and the particular school, time, or period.

Over time, these requirements have been modified, most notably by the Tax Reform Act of 1984 and the Pension Protection Act of 2006. The most notable modifications are (1) the addition of substantiation requirements and (2) further definition of the terms “qualified appraisal” and “qualified appraiser.”

For a federal income tax charitable deduction, the threshold amount requiring an appraisal is $5,000, which applies to any single item or to an aggregate of similar items donated during the same calendar year. Once reached, the taxpayer must

  1. obtain a qualified appraisal for the contributed property,
  2. attach a fully completed appraisal summary to the federal income tax return on which the taxpayer first claims the deduction for the contribution, and
  3. maintain certain records about the contribution.

These requirements are in addition to the general substantiation requirement of obtaining a contemporaneous written acknowledgment stating that no goods or services were received. The failure to provide this information will result in the denial of the federal income tax charitable deduction.

The Tax Reform Act of 1984 further defines the term “qualified appraisal” to mean an appraisal prepared by a qualified appraiser no more than 60 days before the date of contribution. The appraisal must be signed and dated by a qualified appraiser, who states that the appraisal fee is not based on a percentage of the value of the appraised property. The appraisal must include

  1. a detailed description of the property,
  2. the physical condition of the property,
  3. the date or expected date of contribution,
  4. the terms of any agreement or understanding entered into or expected to be entered into by or on behalf of the donor that relates to the use, sale, or other disposition of the property contributed,
  5. the name, address, and taxpayer identification number of the appraiser,
  6. a detailed description of the appraiser’s background and qualifications,
  7. a statement that the appraisal was prepared for income tax purposes,
  8. the date on which the property was valued,
  9. the appraised fair market value of the property,
  10. the method of valuation used to determine the fair market value,
  11. the specific basis for the valuation, such as comparable sales transactions, and
  12. a description of the fee arrangement between the donor and the appraiser.

In addition, the appraisal must be received by the donor before he files the income tax return.

The Pension Protection Act of 2006 adds to the appraisal requirement by requiring the appraiser to acknowledge the understanding that a substantial or gross valuation misstatement resulting from the appraisal could subject the appraiser to civil penalties under certain circumstances. This requirement is added to the previous one that the appraiser acknowledge that an intentionally false or fraudulent overstatement of value in the appraisal could lead to civil penalties and aiding and abetting penalties.

It is clear that more and more emphasis is being placed on the qualifications of the appraiser and the relationship between the appraiser and the taxpayer. A “qualified appraiser” is one who

  1. has earned an appraisal designation from a recognized professional appraisal organization or has otherwise met minimum education and experience requirements set forth in the Regulations,
  2. regularly performs appraisals for pay, and
  3. meets other requirements that the IRS may prescribe in regulations or other guidance.

Further, an individual must demonstrate verifiable education and experience in valuing the property type being appraised and must not have been prohibited from practicing before the IRS at any time over the three-year period ending on the appraisal date.

These heightened requirements make it imperative that the collector or collector’s representatives examine the appraiser’s qualifications. And just because someone is an expert in one area does not mean that he is an expert in all areas.

Further guidance is provided in IRS Pub. No. 561, Determining the Value of Donated Property. Although directed specifically toward donations to charity of tangible personal property, this publication sets forth useful considerations for determining fair market value, discusses valuations of paintings, antiques, and other objects of art specifically, and sets forth the appraisal rules for donations of this type of property to charity.

The uncertainty inherent in the valuation process led Congress to create the IRS Art Advisory Panel in 1968. The panel, consisting of approximately 25 art experts, assists the IRS when reviewing artwork or items with an appraised value of $50,000 or more. The panel is not told whether the appraisals are submitted to substantiate an income tax charitable deduction or an estate or gift tax charitable deduction. The panel’s decision as to value in a particular case is advisory, but its decision has in fact become the official position of the IRS on valuation of the item or collection in question.

It also is possible for a collector to obtain an advance ruling from the IRS, assisted by the Art Advisory Panel, as to valuation. The IRS states that this is for income tax purposes only. This procedure is detailed in Rev. Proc. 96-15:

  • the request must be made after the property is transferred to the qualifying charity;
  • the taxpayer must have obtained a qualified appraisal;
  • at least one of the items transferred must have a value of at least $50,000; and
  • a copy of Form 8283 and the appraisal must be attached to the ruling request.

Once issued, the ruling is binding on the IRS. The taxpayer may dispute the ruling by attaching it, and any additional information in support of the disputed value, to the tax return that reports the transfer.

There is no hard and fast rule on whether it is advisable to seek such an advance ruling. Much depends on the particular set of facts.

Although the IRS takes the position that an advance ruling will be issued only for income tax purposes, the revenue procedure is in fact applicable to gift and estate tax returns, too, so long as all of the requirements of the revenue procedure are met.

Valuation Penalties

Valuations are important—not simply because they can help you plan but also because incorrect valuations can cost money in the form of tax penalties.

For federal income tax purposes, IRC § 6662(e) imposes an accuracy-related penalty for any “substantial valuation misstatement.” If the claimed valuation is 200% or more of the correct amount, the penalty imposed is 20% of the tax underpayment. If the claimed valuation is 400% or more of the correct amount, the penalty increases to 40%.

For federal estate and gift tax purposes, IRC § 6662(g) imposes a 20% penalty if the value shown on the return is 65% or less of the value ultimately determined. The penalty increases to 40% if the value shown on the return is 40% or less of the value ultimately determined. IRC § 6662(h).

The IRS may waive these penalties if the taxpayer is able to establish a reasonable basis for the valuation used and that the claimed deduction was made in good faith.


Everybody loves a good stolen art story! From the massive theft of art and other valuables systematically carried out by the Nazis during World War II to the Thomas Crown Affair to the Gardner Museum heist in Boston, hardly a week goes by that we do not read about some bold art heist—or recovery of stolen artwork—somewhere in the world.

But the topic of provenance goes far beyond the systematic looting by the Nazis. Today, the field of provenance extends beyond recovery of stolen art and includes concerns about authenticity and forgery, chain of title to a particular piece, and competing claims that may arise over a piece of work. “Provenance” to collectors—“title” to lawyers—is critical to the planning process and to the broader practice of collecting art.

Most assets have some form of ownership documentation—deeds for real estate, certificates of title for automobiles, account statements for securities—but most forms of tangible personal property do not. That holds true for most art, although, increasingly, registries are being created to provide some evidence of ownership. Collectors usually are left to keep their own files on ownership. Otherwise, the old adages of “possession is nine-tenths of the law” and “finders keepers, losers weepers” become more than playground taunts.

Until fairly recently—the last generation or so—most people in the art world did not pay particular attention to questions of provenance. If one possessed it, it was pretty much assumed that he owned it. That premise was questioned when the massive amount of artwork stolen in the years leading up to and during World War II started showing up at auction—as did ancestors of the rightful owners! This general fact pattern now is referred to as the “Restitution Cases,” and all major auction houses employ experts in the field of provenance to guard against this problem.

Stolen art is not limited to the ravages of World War II. It is said that Napoleon was the greatest art thief in history, because his armies looted the treasures of the countries that he conquered. We all remember the famous image of Saddam Hussein’s statue being toppled when his corrupt regime was ousted from Iraq. What we did not see were the museums of Baghdad likely being looted.

The lesson from this—besides “don’t steal art”—is that a lot of stolen art is out there. The further away the collector is from the creator of the art, and the older the art is, the more a collector should be concerned about provenance.

A collector wanting to research provenance before purchasing a work has several resources available, none of them completely foolproof. The FBI maintains the National Stolen Art File, a database of stolen artwork reported to the FBI by law enforcement agencies throughout the world. At least two other databases are maintained—the Commission for Art Recovery, which lists items that are still missing from World War II, and the Art Loss Register, which is maintained by insurance companies and the art industry. These databases are limited, however, to items known to have been stolen and reported to authorities.

Although everyone loves a good stolen art story, this issue of provenance extends way beyond stolen art. Questions arise as to “title” of artwork every day—whether art is given or loaned to a family member, business partner, or special friend, or donated or loaned to a museum; whether a consortium of galleries formed to represent an artist retains an interest in works subsequently sold; whether lenders who loan money collateralized by certain works of art retain an interest; and so on. In short, every title claim that you can imagine can be, and has been, asserted against ownership of particular works of art and collections as a whole.

Is It Real?

An area of increasing concern is authenticity. Is the piece of art a collector bought real or is it a copy? And if it is a copy, is it an authorized copy or is it a forgery?

Counterfeit art has been around almost as long as art itself. Certainly legitimate copies exist. Even “copies” painted by the artist—simply the same scene painted more than once—exist. But rising art prices and the increasingly speculative approach taken by some collectors have combined to increase the payoff to forgers.

Remember that provenance is important, not only to the collector, but also to subsequent owners of the art, whether it is sold, passed by gift or inheritance, or donated to charity. Establishing provenance will be much easier if the collector has maintained good records and an inventory of the collection.


Art is an illiquid asset. Certainly it can be sold, but art is not like cash, publicly traded stocks, or bonds, which can be quickly converted to cash through public, mostly efficient, transparent markets. Furthermore, a sale will cause recognition of gain for any appreciation in the art, triggering a combined federal tax as high as 31.8%. Finally, art does not produce a regular stream of income.

The illiquidity of art presents challenges both during the collector’s lifetime and at death. During life, the collection can represent a significant portion of the collector’s wealth, even though it doesn’t produce regular income or capital for other uses. Significant noncharitable transfers of art during life may require the payment of federal gift taxes. At death, in addition to possible federal estate taxes, significant estate administration expenses will be associated with the cost of storage, insuring, and other risk management of the art, and other costs associated with owning, maintaining, and disposing of a collection. Furthermore, depending on the ultimate disposition of the collection, the estate may require liquidity to equalize distributions if an unequal distribution of the collection is planned.

In short, not only may art be expensive to acquire, but also it is expensive to maintain and dispose of.

Art Lending

Certain financial firms and private banks have long offered their qualifying clients loans secured by valuable works of art. This especially has been true in the recent past as the value of art, in general, has grown significantly, more high net worth individuals have acquired art, and art markets have become a bit more transparent.

Loan details, of course, will vary, as so-called “art loans” are individually negotiated. Lenders generally do not look to the sale of the art for repayment but, rather, will require that the collector have another source of repayment. If the art is legally owned by an entity, such as a limited liability company, the collector will be required to guarantee the loan. The collector also will be required to carry insurance equal to the appraised value, with the lender as a named loss payee.

Taxes and Related Expenses

If the collector determines to make gifts of art to family members or other noncharitable donees, any gifts above the applicable exclusion amount will require the collector to pay federal gift tax. To the extent that the collector dies owning the art, and the value is such that estate tax is due, estate taxes must be paid within nine months of the date of death, even if the estate tax return itself is extended. In either case, when transferring an asset of potentially tremendous value, but without corresponding liquidity, another source of assets must be used to pay any tax due.

Other situations arise that may require additional liquidity.

A donation to charity generally gives rise to a federal income tax charitable deduction for the full value of a gift (during life) or bequest (at death), meaning that no gift tax liability or estate tax liability will be incurred for a qualifying charitable gift. It is not uncommon, however, for a museum or other appropriate charity named receiving a collection to expect some amount of cash gift to accompany the art, to provide for an endowment to support the continued curation of the collection.

During the period of estate administration, costs of maintaining and insuring the collection can be significant. And beyond estate administration, the collector also must consider the resources of the eventual recipients of his collection and whether the collector will need to leave such recipients sufficient other assets to ensure their ability to maintain the collection.

Estate Equalization

A collection can constitute a significant portion of the value of an estate, which can pose issues when fewer than all family members have an interest in the art, yet all want “their” share of the value. Any planning will need to take into account not only the need for liquidity to pay estate taxes, but perhaps also the need for liquidity to “equalize” the inheritance.

In summary, one of the greatest challenges of owning art is its illiquid nature, which must be taken into account in the planning process.

An Introduction to Planning

Art is a unique asset. It is an asset of passion but also an asset that is expensive to own. It is illiquid and does not produce current income. Combined, these characteristics present both technical and personal planning challenges.

For the collector concerned with the seemingly endless choices about what to do with his art, he really has only three choices: sell it, give it to family (or another noncharitable beneficiary), or donate it to a charitable beneficiary. And there really are only two times he can do this: when he is alive and when he is not.

Three times two equals six, and this is how many options the collector has. These options are not mutually exclusive; in fact, it is common for a collector to use more than one planning option. These options are exhaustive, however, and there are no others.

Unless, of course, the collector selects the default option, which is to do nothing. Doing nothing may be the right choice. But even if doing nothing is the right choice, it should be an educated choice.

Setting aside the do-nothing option, Part 2 of this article will explore the six better options available to a collector:

  • sell during life,
  • transfer during life to family or other noncharitable beneficiaries,
  • donate to charity during life,
  • sell at death,
  • bequeath at death to family or other noncharitable beneficiaries, and
  • donate to charity at death.
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