When it comes to estate and gift tax planning, not all assets are created equal. If you own any valuable artwork or collectibles, you will realize that these are some of the toughest assets to pass on to your heirs. As a collector, the biggest mistake that you can make with these assets is not planning. When trying to pass your treasures on to your heirs, consider these ABCs of collectible planning: “Appraisal,” “Basis” and “Communication.”
A Is for Appraisal
Artwork and collectibles are subject to estate and gift tax the same as any other asset. Understanding the value of the asset is important to proper planning. This may help you determine how to divide up the assets, whether you should sell the asset or if you are better off donating them to charity—either during life or at death. Our perceived value is often not in line with actual value if the property were to be sold. Therefore, always engage the right expert when it comes to valuation.
B Is for Basis
Your basis and the capital gains tax will also be major factors in planning for your artwork or collectibles. The capital gains tax rate on the sale of these assets is 28% (versus 15% or 20% on long-term capital gain property). If you gift artwork during life, for example, the recipient will take your basis in the asset. Therefore, if you have low-basis collectibles, the trade-off for getting the asset and future appreciation out of your estate is that you will lose the step-up in basis and that if sold the recipient will pay 28% tax on the gain. That is why these collectibles may not be the best assets to give away.
C Is for Communication
You need to have a good understanding of what you have and to whom you wish to leave it. A provision in your will that leaves all tangible property to your spouse or equally to your children will generally not suffice if you have valuable collectibles.
Proper paperwork is key to communication. First, create an inventory of all your objects (with basis). Then discuss this list with your heirs to determine if the recipient wants to keep it—for sentimental or other reasons—or just sell it.
Also consider how this property should be held. For example, consider a revocable trust to avoid issues with probate and administration. You might also consider dropping these assets into a limited liability company (“LLC”). This makes it easier to distribute fractional shares of each asset to your heirs for gifting, and this allows for discounts for fractional interests for estate and gift tax purposes.
Given the complexities involved, it is critical to consult knowledgeable advisors when planning for your collectibles. But whatever you do, please do not collect autographs. I started a petition to ban people from collecting autographs. So far, I have 10,000 signatures.