As a collector, you may devote extensive time, energy and money to pursuing your passion. Managing a unique collection, whether it consists of art or other collectibles, requires patience and attention to detail. It can also involve a range of practical considerations, encompassing acquisitions, insurance, security, maintenance, preservation and tax issues.

To that imposing list, I would add estate planning as a crucial element. Although it may sound counterintuitive, I believe estate planning can actually enhance your enjoyment of the collecting process by reducing uncertainty as to the collection’s future disposition and creating confidence that your heirs and, in some cases, the public can enjoy it for years to come.

Planning for All Your Collectibles

Although art typically carries the highest dollar value, substantial collections may also consist of antique furniture, ceramics, jewelry, wine or cars—there is really no limit. Indeed, newer generations of collectors have focused on sneakers, handbags and digital art like NFTs (non-fungible tokens), among other categories.

Whatever you collect, we believe it is important to plan with the same care as you would for any other financial asset. Effective estate planning for art and collectibles can help mitigate potential disputes, reduce tax liability, and ensure that the pieces can be enjoyed and appreciated by future generations.

That said, collections of art and other objects are different in some ways from other assets. Although some works have enormous financial value, the impetus for owning them is rarely only monetary. When you consider what should happen to your collection after your death, you may hope to find a recipient who shares your passion and desires to possess the collection, whether that beneficiary is an individual or an institution. You may also believe that your collection should remain intact in order to give future generations the opportunity to study and enjoy the works side by side. Alternatively, you may want each piece to have the best home. No matter the goal, I believe planning is essential.

Lifetime Giving

As a collector, you may not wish to wait until your death for your collection to be distributed to a charity or family members. As such, you may choose to make lifetime gifts of art to individuals or to trusts for their benefit. One downside of lifetime gifting is that gifts carry the donor’s basis. In other words, the recipient shares the same cost as the donor for tax purposes. And if the object is sold, the recipient will owe capital gains tax on the amount of the sales price over your basis. Importantly, sales of collectibles are subject to a special capital gains rate of 28%, which is higher than for most other types of property.

With a lifetime charitable gift, it is possible for collectors to obtain a charitable deduction equal to the fair market value of the work, as long as the recipient charity’s use of the work is related to its tax-exempt purpose. For all but the most valuable and rare works, finding an institution to accept a gift of art for a “related use” can be challenging.

Disposition at Death

When a work of art or collectible carries a low tax cost basis (for example, if you purchased a painting before the artist became well known), it is generally preferable to wait until your death and have your estate make a noncharitable transfer in order for the object to receive a step-up in basis to fair market value. With a charitable transfer at death, your estate will receive a charitable deduction for the fair market value.

Choosing a beneficiary to receive your prized collection may be anxiety-producing, given that you likely want it to be maintained with the care that you have provided during your lifetime. Having conversations with potential beneficiaries and educating them about the collection can strengthen their commitment to your goals.

Including specific instructions in your estate planning documents can help as well. It is vital to clearly define the collection and/or identify objects of particular importance to distinguish them from your other tangible personal property. If you have a large collection, you will want to ensure that the fiduciaries (executors and trustees) have experience dealing with art or collectibles, or have connections to experts in the field who can be hired to administer the collection-related aspects of the estate. Involving experts is especially important when sales are anticipated.¹

Getting Organized

Any transfer of works of art or collectibles, either during lifetime or at death, will likely proceed more smoothly if you have conducted proper record-keeping. A well-maintained inventory list is essential, and should include information regarding acquisition history, insurance, condition, copyright ownership (which can be different from ownership of the work in certain circumstances) and the physical location of each piece.

With digital artworks like NFTs, you should clearly communicate how to find and access the item. NFTs are stored on blockchain in digital wallets. If you do not provide proper instructions to the executor, trustee or beneficiary, the NFTs could be impossible to access, and their value lost.

Appraisals and Record-Keeping

Acquisition records are particularly important in estate planning, since the recipient of the artwork or other object will need to be able to provide evidence of the “provenance” of the work if it is ever sold. Any lack of clarity in the chain of title or provenance history can have a dramatic impact on the market value, and in some cases can render a work unsellable. The condition of an object can also have an impact, making the conditions of display and storage very important.

Whether transfers of art are made during lifetime or at death, all transactions involving works of art are closely scrutinized by the Internal Revenue Service. Any lifetime gift would need to be reported on your gift tax return and any transfer at death will be reported on your estate tax return. In both cases, a qualified appraisal will need to be included with the tax return. The IRS Art Appraisal Service automatically reviews taxpayer appraisals that contain any single work of art valued at over $50,000, and items valued at over $150,000 are reviewed by an additional group, the IRS Commissioner’s Art Advisory Panel.

Choosing a Future Owner

When considering a future home for your collection, you will want to think carefully about your choice. Naturally, the recipient should have a desire to own the works, but also must be able to take responsibility for them by maintaining suitable conditions for their storage and display, proper security and insurance. Similarly, when naming a charitable beneficiary, it’s ideal to have conversations with its representatives to ensure that they are prepared to receive the objects. Museums often face challenges around the cost and physical space required for storage, so they are constrained in the number of new pieces they can accept. As with any aspect of estate planning, having conversations with your beneficiaries can clarify whether they are prepared to accept their bequests.

Final Thoughts

In my view, estate planning for collectibles demands a multifaceted approach, balancing financial, legal and emotional issues. Owning valuable objects comes with unique privileges and challenges, which can be addressed and navigated through careful planning. By engaging with qualified professionals in collections management, insurance, appraisals, tax and estate planning, I believe you can have more confidence that your intentions will be honored, and your legacy protected.