Forty years ago, architects Lucia Howard and David Weingarten began picking up European artifacts from the centuries-old Grand Tour era, a time when wealthy youngsters toured cultural epicenters as part of their education. Unlike a resin Eiffel Tower you might pick up at Orly Airport nowadays, the souvenirs for these early tourists were fine replicas of existing or ancient landmarks, crafted out of brass, marble, glass, or even paper.
Howard, 66, and Weingarten, 65, now claim the largest Grand Tour collection in the world, with some 4,500 sculptures, architectural models, mosaics, paintings, and other artifacts. The collection, exquisitely displayed in their Lafayette, Calif., home, has an otherworldly quality.
But there is a related story of this quest: the tax implications of owning a valuable collection.
Tax rules for collectibles are complex, but sound planning to minimize burdens can be critical to the preservation of a collection’s value over the long term. Below, tax experts break down some of the most important moves:
Keeping it in the family: If you intend to leave your collection to heirs, the Tax Cut and Jobs Act passed into law late last year opens the door to some massive tax savings.
The law doubles the estate-tax exemption to $11.2 million, or $22.4 million for a couple. While this part of the law is set to expire in 2025, exemptions can be used during your lifetime through gifting. “Consider locking in this higher exemption by giving away assets up to the new level over the next seven years,” says David Leibell, a senior wealth strategist at UBS.
Choose collectibles likely to appreciate the most in value. “That way, you can avoid a lot of future capital-gains tax,” Leibell says.
Keep in mind that the final tax bill eliminated an earlier promise by lawmakers to honor the higher exemption retroactively, even after it expires. “It isn’t 100% that if you use the exemption now they won’t claw it back,” says Bradford Cohen, partner at Jeffers Mangels Butler & Mitchell in Los Angeles. “Still, we’re advising people to take advantage of it now.”
If you decide to pass on your collection through your will, sort out how your heirs will cover estate taxes. Consider buying life insurance, housed in a trust, to pay future estate taxes, Leibell says, so heirs won’t have to sell off a portion of the collection to cover the tax bill.
Donate to charity: Tax deductions for charitable contributions can go a long way toward reducing your overall tax burden, but plan carefully to get the most bang for your gifts.
If you donate collectibles during your lifetime, the gift must be of related use to the charity to get a tax deduction for its full value, up to 30% of the donor’s adjusted gross income. “For example, artwork must be given to an organization that exhibits artwork,” Leibell says. “If you give it to the Red Cross, you’ll get a deduction for the cost basis.”
Different trusts can be used to pass on collectibles to charities over time, while keeping control over them and getting the benefit of upfront deductions and, potentially, an income stream for a trust’s term.
If you wait to make an outright donation to charity in your will, its full value can be used to reduce your taxable estate.
To get both a deduction and raise some cash, consider a so-called bargain sale to a charity in which you sell an asset for below fair market value, Leibell suggests. This may trigger some capital-gains tax, but you can take a deduction for the value of the donated portion of the asset.
Buy and sell wisely: The new tax rule eliminated tax-free like-kind exchanges for artwork and other collectibles. This is a transaction in which a collectible could be traded for another of the same value, without incurring capital-gains taxes.
But now, without this ability, sales of many collectibles are likely to decline, and owners will be looking at creative options for being able to prune or add to their collections.
Cohen advises considering a pass-through entity to house a collection. Pass-throughs are partnerships, S corporations, and limited liability companies. Income from these entities is taxed under rates up to 37% as of this year, but the new tax rules allow for a 20% income-tax deduction.
The task for collectors? Figure out if you’re better off incurring capital-gains taxes at a top rate of 20% when you sell a collectible, or be subject to a 37% income-tax rate after claiming a 20% deduction, Cohen says.
Another move to size up: Create a personal museum on your property, and claim a tax deduction for the items donated. Be cautious, however. The Internal Revenue Service doesn’t like these, and will demand proof that the museum is accessible to the public, has proper insurance, and is otherwise catering to outside visitors.
Furthermore, try to maximize the value of your donations. A themed collection in its entirety is likely to be valued higher than if it were donated piecemeal, says David Lehn, a tax partner at Withers Bergman in Greenwich, Conn.
Howard and Weingarten plan to prune their collection this year by donating a comprehensive chunk of it to the National Building Museum in Washington, D.C. They plan to give souvenirs from the Grand Tour’s final years in the early 20th century.
As with any sale or donation, pay attention to the IRS rules on appraisals, or months of strategizing can be all for nothing. As Cohen says, “A small foot-fault can reduce any tax benefit to zero.”
Got questions about how new Tax Law will affect you? Don’t pay more in taxes than you’re required. Give us a call today at 636-394-5524 and let us help guide you through the complexities of these new rules.