Don't ignore collectibles in clients' estate planning process

By Don Wilkinson

DFW & Associates


Most advisors are comfortable with stocks and bonds, real estate and other traditional assets when arranging an estate plan for their clients. However, when it comes to a client's art collection, antiques or even old toy trains, most advisors put such items in the personal property area or ignore them all together.

This is not a good idea, as a client's collection of fine art or antiques could be worth a sufficient portion of the entire estate. This is especially true with very high-net-worth clients whose portion of discretionary income, more often than not, may have been invested in a lifetime of collecting classic cars or an extensive accumulation of vintage wines.

The issue is further compounded because the collector client usually doesn't discuss their collections with their advisors. Thus, their advisors can easily overlook this subject entirely, even though families with net worth in excess of $10 million routinely collect something of value and it is estimated to average 10 percent of total wealth, according to Randy Fox, founding principle of InKnowVision, LLC, a national consulting and marketing firm that develops wealth management strategies for high-net-worth clients.

The simple answer for advisors in planning for your client's collection is as important as planning for his or her other assets. In fact, all assets of wealth must be processed together in order for your client to have an orderly transition of legacy for succeeding generations.

If not, a lifetime of collecting can disappear overnight on the passing on of such collectibles to the next generation. Children can fight over portions of a collection; the collection can be decimated by forced liquidations to pay estate taxes; or auction fees of collectibles can take huge bites out of income and fractionalize the value. Meanwhile, the impulse to resell or claim collectibles by the next generation can lead to tax fraud.

Thus, collectibles planning is essential and the advisor needs to be comfortable about talking with the client about the subject. Some advisors even put emphasis on clients' collections, having the distinction of becoming an "art succession advisor." There are a few of these specialists around who press the client about the importance of the collection, its history, meaning to the client personally, and where the collection stands with his estate succession plan.

Collections of a serious nature need to be catalogued, evaluated, appraised, ranked and authenticated. Further, discussions with client and advisor should revolve around tax implications. If donating or selling portions of the collection, that could be good strategy to avoid capital gains (28 percent for collectibles) before the client passes.

If you are still considering the matter of collectibles trivial, consider this: By 2052, an estimated $41 trillion in assets will be passed inter-generationally, according to the Social Welfare Institute at Boston College, and experts say art and antique assets will make up approximately $4 trillion to $6 trillion of that figure.

Still, we are seeing professional advisors ignoring art succession planning under the belief that collectibles are not assets. Collectors themselves also may not consider their tangible assets such as family jewelry, an antique toy collection or classic paintings as having significant worth.

Failure to recognize either by the advisor and/or the collector client could be costly. Not having a proper art succession plan may mean your client's heirs could face hefty tax liabilities. No inventory control and/or regular appraisals may produce an unreasonable value of collections among members of the generations to come. For example, your client's heirs may dispose of a valuable collection at a quick auction and lose as much as 70 percent of the collection's value after taxes and transaction fees are factored in, according to Michael Mendelsohn, present of Bridge Art Strategies, LTD, an art succession planning firm.

Mendelsohn recommends these tips to guide your client after you are made aware of the existence of collectibles which should be part of your client's overall estate plan:
    1. Advise clients to maintain an up-to-date inventory of art, antiques and collectibles.

    2. Advise clients to get a qualified appraisal and valuation.

    3. Advise clients on keeping good records of purchases and sale transactions.

    4. Advise clients to identify charities that would benefit through gifts from your client's collection(s), either through a trust or given outright.

    5. Advise clients on becoming familiar with dealers, appraisers, museum curators and other collectors who have expertise in client's area of collectables.

    6. Advise clients to assemble other advisors if needed: attorney, tax specialist and art succession planner.

    7. Advise clients on insuring collection against loss or damage.

    8. Advise client on recognizing the value of the collection and your recommendation to include in client's overall estate plan. Would irrevocable trust or charitable remainder trust work for your client? Or better, financial-based products.

    9. Advise client to determine if individual pieces in his/her collection have capital gains implementations requiring special planning. As you know, capital gains determines if it makes a difference whether your client purchased the asset, inherited it, or received it as a gift, so it is recommended to consider some collections on a piece by piece basis.

    10. Advise your client to have a talk with his/her heirs to determine if they plan to retain the collection or sell off for cash. It could make a difference in how client formulates his estate plan.
Following these tips will insure your client and you are in sync in regards to valuable collections planning, which means taxable savings for future generations and avoids the possibility of the transfer of goods that are not documented and on which no taxes are paid. This could be very costly to heirs, since estate tax fraud has no stature of limitations.

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