Art collectors do not need to call talent agents for a top model. The model art pros need is in the Journal of Accountancy, which can help the owners and managers of large collections navigate through the maze of different tax regimes resulting from the passage of tax changes on December 17 last year. While the bill passed last year, some of the rulemaking is still taking place and some ambiguous issues will probably not be resolved until they are decided in court. Fortunately, the expert panel at the California State Bar's 84th Annual Meeting and Continuing Legal Education pointed out, it is possible to file a “petition for instructions” in the relevant court. That is usually probate for estates, family court for divorce cases and Federal Court for bankruptcy cases.
The price for not planning ahead will be high. The top rate on estates, including assets in art collections, is increasing to 55%. (So much for “read my lips, no new taxes.) By contrast, art collectors who plan ahead and organize an art collection as a legitimate corporation with rentals and sales as Las Vegas hotelier Steve Wynn has done can reduce the taxation on increases in value to 15%, as well as get some benefit for the expenses of maintaining the works of art.
Financial modeling has not been routine among art collectors, but those with collections worth over $1 million essentially have no choice any more. This has become part of their due diligence requirement. That includes reconstructing the acquisition cost basis if they have not maintained careful records for the acquisition prices. Since many art collectors have acquired art by exchanging other works of art or using a credit for artwork returned to a gallery, this can require substantial effort.
Presenters Michael Gerson, Patrick Kohlmann, and James Lauth did a thorough job of explaining the most important changes that asset owners and their advisers need to plan for. The key word is SIGNIFICANT. That is the word the presenters use to describe the changes that started this year. These changes often involve important choices for the treatment of both art collections and financial assets, so that financial modeling is recommended to choose the approach that is best for you. Fortunately, there is a model spreadsheet available for free at the site of the Journal of Accountancy at this link:
Of course, you need to know the appraised value of your artwork to model the alternatives correctly. If you were wise enough to save purchase receipts or cancelled checks for your art purchases, that may not take much time or money. You can chose to get a valuation report using comparable category value increases. This applies annual prices increases for works in similar art categories to the art you own to adjust your original purchase price to a current retail price equivalent. Because the asset value for estate tax purposes is the wholesale price, this figure is reduced to an equivalent total price.
As the presenters pointed out, there are some special circumstances that require special attention. A good example is blockage discounts. These occur when a particular collector has a large share of the artwork in a particular category, such as California plein air paintings of Catalina. If all these paintings were sold at once, that could flood the market and reduce prices by 10-15 percent. These important details of owning and managing an art collection are important reasons to put an appraisal of your artwork collection on your to do list.
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