Jul 2, 2018 | Art Bits
I know you’ve figured this out already – collecting art is fun and relatively easy assuming you have a passion for what you are collecting, have the wall space to hang the art, and the means to buy it. But when it comes time to planning for the disposition of that work of art, the only easy thing is recognizing how hard it is to transfer that asset to future generations. That’s why so many art collectors default to the “I’ll give it to my kids” plan of action. Which is essentially a choice to make no choice (unless you are absolutely, positively certain that your family wants to keep your art for the long haul, and not just long enough to make sure you won’t prevent them from monetizing it!). Assuming you would like to give your art away during your lifetime to someone or some organization that would appreciate it, and assuming your relatives are not those people, donating the art to a charitable organization may make sense to you. Plus, you might think, “all the better, because I’ll get a nice big charitable deduction as well”. Well, yes and no!!
Donating art and collectibles during your lifetime is a wonderful thing, but in addition to all the federal income tax rules that comes with donating assets, it also comes with some important IRS rules that must be adhered to if you want to maximize your deduction for donating art. One of the most important rules is the “Related Use” rule. No, it doesn’t have to do with your lineage or your Uncle Harry. It does have to do with donating tangible personal property to a charitable organization, and how that property is used by the recipient charity.
If the use of the art is deemed “related” to the mission or purpose of the charitable organization, then the donor could be entitled to a federal income tax deduction on the asset’s fair market value, subject to a cap of 30% of adjusted gross income (AGI). This assumes the collector has followed other rules including owing the asset for more than one year and giving the asset to a public charity. What happens if the art is not going to a related use? If the use is unrelated, then the federal income tax deduction will be limited to the cost basis of the art (though up to 50% of the donor’s AGI).
The federal income tax treatment of donating art depends to a large degree on how long you’ve owned the art, the type of charitable organization to whom you want to donate, and how the organization intends to use the art. It’s complicated, but important to good planning, and an excellent reason why your CPA is important to the future life of your art collection!!
What does that mean in reality? A good example of related use is giving your art to a museum which could then use the art as part of its permanent collection and in adherence to its mission (assuming the museum accepts your gift of art). Giving your art to the local animal shelter, which wants to sell your art immediately to generate some cash to add to its endowment fund is an example of unrelated use. That doesn’t mean you shouldn’t give the art to your local animal shelter, it just means that you may be looking at a much lower potential deduction arising from that donation. Which may, or may not, be a deal breaker for you. It all depends on your motivation behind donating the art and your relationship with the charitable recipient – and that, you could say, is all relative.
Jan 12, 2018 | Art Bits
Appraisers assign a value to a work of art by looking at multiple factors: comparable art, condition of the piece, size, rarity, genre, medium, and provenance to name a few. Their goal is to arrive at a valuation that supports the price an art work will realize if it is put to auction, donated, insured or gifted. But as collectors, we also place value on art based on intangible factors, such as the effect the art has on us emotionally when we view it. Sometimes that is based on the composition of the piece, its form or shape, the colors, the style, the message it seems to convey to us. If we are lucky, we find the piece that we love combines both the quantitative measures of worth with the intangibles that compel us to purchase it to begin with. This is true particularly if the art work appreciates in value over the time it is held by us, or our family. Then we feel satisfied emotionally, plus very proud of ourselves for making such a savvy investment.
Of course, as we all know, art doesn’t not always increase in value over time. Like any other asset, different artists and genres cycle in and out of popularity, based upon cultural trends, global marketplaces, the economic outlook in a particular market, and supply and demand characteristics for that particular artist or style. Even so, most of us stand behind the art that we cherish, unmoved by market conditions, because we have placed an emotional value on that art, and can withstand fluctuations in the market.
The concepts of worth, value and valuation, were driven home to me by the recent auction by Christie’s of Leonardo da Vinci’s masterpiece painting Salvator Mundi for $450 million. Rumors swirled around this transaction as bits of information made its way to the public over a period of weeks. The price tag that the painting was ultimately sold for was way beyond its estimated value before the auction, especially given the uncertain nature of its provenance, including questions around its authenticity and condition. But that didn’t matter to the ultimate buyer, which appears to be the Abu Dhabi Department of Culture and Tourism. It has been reported that its new home will be the Louvre Abu Dhabi. Given the premium paid for the painting, it also didn’t seem to matter that the acquirer probably wouldn’t be able to recoup that price should the work of art make its way to the market again at some point in the future. To this buyer, It was WORTH IT, no matter what the cost, to obtain this rare, newly re-discovered work of art by a master artist.
That’s an extreme example that goes way beyond the normal transaction experienced by most collectors, both in terms of the dollars paid and in terms of complexity of ownership. But it is still a worthy one (so to speak). What a buyer is willing to pay for a work of art can appear to border on the seemingly irrational, emotional, or intangible, such as a spiritual connection or being compelled by its visual beauty or even having an affinity for the works of a particular artist. Such as having the desire to own a heretofore lost masterpiece by one of the most renowned artists in history. It may turn out to be the most savvy decision ever made despite the price paid. Or it may not. But clearly price was not the issue here. As with so many collectors, the motivation to purchase art encompasses a great many things, some of which can be quantified, and some not. At the end of the day, after you’ve done your due diligence, your sense of its intrinsic worth to you, what it means for you to own that piece of art regardless of price, is the key question. Ideally, over time, the decision to buy the artwork will be supported by both the fundamental, quantifiable virtues of the piece, as well as the intangibles that caught your eye and heart to begin with.
Oct 21, 2017 | Art Bits
Art Markets and Stock Markets. This past week marked the 30th anniversary of Black Monday. That is the day in 1987 when stock markets around the world crashed, beginning with Hong Kong, spreading to Europe and ultimately to the US where the Dow Jones Industrial Average (DJIA) fell 22.6%. To this day it is still the largest one-day percentage decline in the DJIA. Importantly, it was the first truly global financial panic that impacted exchanges around the world. There are plenty of theories for why the global markets swooned, but most of the blame falls on the acceleration of computerized program trading involving both institutional markets and pension funds plus mass speculation on the part of individual investors.
Beyond the obvious reasons, this day is memorable to me because it was my first day working for the Regents of the University of California in their pension and endowment group. And instead of running for the hills, the Treasurer was actively buying blue chip stocks, finding bargains for the top-quality names that made up the portfolios at that time. I was amazed, perplexed and exhilarated by the activity of the traders.
I learned a great lesson about human nature, and the markets that day. I realized it took great conviction and a sense of history on the part of the Treasurer to go against the direction of what seemed to be a major turning point in the markets. Armed with an understanding of economic and market trends, the Treasurer was convinced that the underlying economy was still strong and that the market rout was then more of a technical move than a fundamental one. She turned out to be right, and the timing of her investment strategy was spot on.
Booms and Busts. What does this have to do with the art market? Plenty. Like investors in the stock market, art buyers have also been susceptible to booms and busts going back as far as the mid-1500’s when the modern art market emerged during what is termed the Dutch Golden Age of Art, a time when the Netherlands became the most prosperous nation in Europe. A booming economy and vibrant financial markets supported the emergence of a middle class who were eager to participate in the profits being generated by a growing number of multinational corporations. The rise of professional art dealers accompanied the large quantities of art being sold, with art fairs proliferating that could cater to the growing speculation in the art market.
When the Anglo-Spanish war broke out in 1585, the art market collapsed, temporarily affecting the emergent middleclass market and its demand for art. Despite this downturn, The Golden Age of Art ended up spanning the 17th century. In addition to the proliferation of art produced during this period, it is famous for the emergence of some of the most historically relevant artists, like Rembrandt, Vermeer and Frans Hal.
This account is but a fragment of a fascinating period in art history, but the point I am making is that the cycles of boom and bust churn their way through history. The booming global art market that arose from the great recession of 2008-2009 seems to mimic the distant past. We too have seen a huge volume of art hitting the international marketplace via a multitude of biennials and the emergence of super dealers. EBAY touts volumes of inexpensive works available to an expanding number of newly minted art consumers, while at the other end of the market, proven masterpieces are being auctioned off at eight digit prices.
The more things change….At the same time, we are seeing the U.S. stock market once again hit new highs, despite underlying concerns of changing dynamics in the global economy, and a transitioning credit cycle. History teaches us that exuberance and mass speculation in any market will ultimately end, as we have seen this year in the marketplace for works of emerging art. It may be triggered by a fundamental change in the economy, an external event or due to a technical hiccup in the marketplace. It may last just a few weeks, or it may last over a number of years.
We’ve been fortunate since 2008-2009 when the great recession brought the global marketplace to its knees. But at some point, we will once again participate in a major shift as the markets change course, and the conditions that feed booming demand for stocks or art, or both, dry up. But at that moment when the market seems to have lost the ability to go back up, as it seemed at the bottom of that one day decline in October 1987, again at the bottom of the market rout in March 2009 or in the midst of the Dutch war for independence in the 17th century, those with conviction and a sense of history will have the courage to step back in to support the next bull cycle.
For those interested in reading a fascinating account of booms and busts throughout history, I recommend “Extraordinary Popular Delusions and the Madness of Crowds,” by Charles MacKay, LL.D. It may come in handy in the decade to come!
Sep 1, 2017 | Art Bits
As a kid, I would roam around my parents’ house, admiring the paintings and objects d’art that they had collected over the years. My sister and I would call dibs on the items that we favored. It was a bounty of goods, and I was sure that each and every item would be with me for the rest of my life. But as the years went by, and I married and established my own household and sense of style, I realized my interest had diminished. Sure, there were a few items that I considered to be heirlooms, or of enough investment value to keep and treasure over the years. But I never talked with my parents about their wishes, and when they passed away several years ago, the decisions around which items I would keep or dispose of were hard made and emotional.
So it was with interest that I came across a New York Times article with the bold title of “Aging Parents with Lots of Stuff and Children who Don’t want it”, by Tom Verde. In the article, the author captured my experience. Bottom line, as baby boomers grow older, retire and downsize, they are expecting that their children will cherish the keepsakes they’ve gathered over the years. Guess What? The kids are living their own lives, and don’t necessarily want to clutter their lives with their parents’ “stuff”. Importantly, it’s more than an issue of want or desire. Kids today may not have the room or the means to hold onto these things. And it’s part of a larger national trend as the population ages, and cultural mores change.
The article focused primarily on items like furniture, china, favorite crystal pieces and jewelry. The stuff of everyday life. But the trend away from the passing down of heirlooms and keepsakes includes luxury items as well, like stamp and coin collections, wine and art. The stakes get higher when dealing with the kind of items that have more potential value than might be recognized by the intended beneficiaries or the agents who represent them.
The one common denominator between the passing down of household goods, or transferring highly valued assets like art is the need for communication between family members. Often the conversation around who gets what, or the importance of an item to the family dynamic goes unspoken. The lack of dialogue could have a meaningful financial impact on the family, especially if there are significant taxes due on the family estate or capital gains due when a valuable item gets sold at auction. Too often, planning decisions that could benefit the family, like donating assets to a charity, are simply bypassed because the dialogue never occurred.
Having a conversation around the family’s belongings is but the first step in making a plan around the disposition of valued items. But it is a critical step in recognizing and identifying both the financial and emotional value of the treasures that make up our lives.
Aug 4, 2017 | Art Bits
The last thing most collectors think about when adding to their collections is, “What will I do with this work of art in 10 years.” But maybe maximizing your financial return on an art collection should one of a collector’s first thoughts. Art collectors could benefit from thinking more like successful entrepreneurs when it comes to managing their art collections.
Why you should think about maximizing your financial return on an art collection
Entrepreneurs often devise an exit strategy when they first invest in a start up. Why think exit strategy? An exit strategy is a well conceived plan aimed at achieving a desired rate of return after investing both time and money into a growing business. For many entrepreneurs who have invested large sums of money, an exit strategy helps the owner to thoughtfully transition ownership of his or her assets at an appropriate point in time. Like the entrepreneur, the active collector grows a collection with the hopes of realizing both the emotional joys of owning great art and the benefits of owning art that has increased in value over time.
Why you might need to divest your art collection
Now it may seem contradictory to talk about divesting what you’ve spent a life time building. Isn’t building an art collection what you do when you have achieved success, and have both the means and the time to finally enjoy your “passion projects?” Perhaps.
Many gather their art collections over the course of their lives. They amass a range of art assets that they have to find a home for at some future point. It’s trite, but true — you can’t take it with you. A collector might downsize, moving to a smaller house after retirement. Or perhaps she is in a financial position where it makes sense to donate to a charity given the size of her taxable estate. Maybe it’s as simple as wanting to give assets to the children or grandchildren to fulfill a family legacy, while avoiding the drama that can accompany gifting to family members.
Developing an art-ful exit strategy
Entrepreneurs and collectors see a similar range of options for a graceful exit. They decide between liquidation, gift or donation; public sale or private. Planning for the ultimate disposition of a company gives the business owner control over the finer points of the negotiation. Like managing return on investment or the impact of potential taxes on the ultimate estate. Art collectors can assure a similar result as well. An exit strategy helps determine ways to monetize illiquid holdings. In addition, a well thought-out plan guides the family, allowing them to focus on ensuring their family legacy.
Plan Art LLC wants to help you determine the best future for your art collection. Contact us to begin planning.
Jun 4, 2017 | Art Bits
“The Red Violin” is a 1998 Canadian film that relays the fictional history of a mysterious red colored violin crafted in Italy in 1681. The story of the violin spans over four centuries, five countries and multiple owners. It ultimately makes its way to an auction house in Montreal in 1997, its origins brought to life by an astute appraiser. I won’t reveal the ending of this award winning movie (directed by Francois Girard) but it is worth noting that the story was apparently inspired by a historic 1720 Stradivarius violin called the Red Mendolssohn, whose provenance is equally fascinating.
Why Provenance Matters
The word “provenance” comes from the French verb “provenir”, which means to come from, or stem from… marking the beginning of an entity’s existence. It is most often used to reference a record of ownership of a work of art or an antique, and used as a guide to its authenticity.
Though most collectors may not deal with a work of art whose history spans centuries, the importance of a work’s provenance survives. It is essentially a chronology of the ownership of the work, and gives the owner, and future owners, a historical context. The history of the ownership will play into the ultimate value assigned to the work of art, That includes the manner of acquisition, the character of the former owners, and the environment from which it came. Clearly, the older the piece, the more important the trail of ownership.
Establishing the provenance of a work of art starts with basic record keeping. That means maintaining original bills of sale, and the accompanying documentation that will establish ownership and title of the piece. That would include a record of exhibitions, appraisals, previous owners, mentions in an exhibition catalogue (catalog raisonne), updated biography of the artist, or mention of the artist and artwork in a magazine or newspaper article. While important, a certificate of authentication is often but a starting point.
Surprisingly, while many art collectors understand the importance of ownership when viewing historical or contemporary masterpieces, they give less scrutiny to the chain of title of the living artists they collect. That comes back to haunt even sophisticated collectors when and if the piece is put to auction, donated or passed down to future generations only to be later sold and monetized. At some point future collectors, dealers and yes, even the IRS will want to have a clear cut paper trail dating back to the origins of the art.
Recent Comments