Artwork is among the most collected “investments of passion” among high-net-worth and ultrahigh-net-worth households and is increasing among advisers' clients.
Worldwide, 600,000 millionaires are serious art collectors and high-net-worth individuals spend an average of 17% of their wealth on art and antiques. In 2013, the U.S. market for art and antiques increased by 25%, strengthening its worldwide importance with 38% of the global market.
But as clients consider where their collections fit in their estate plans and charitable legacy, often they find their passion is not shared with their heirs.
Matthew Welch, deputy director and chief curator of the Minneapolis Institute of Arts, has found that "collectors are passionate about their collections, but their children often aren't as invested in the collection. Tastes change."
A big part of helping clients with their artwork charitable legacy is about “relationship” management — the relationship the client has with their collection and their future plans for the collection. While an independent art adviser is an important part of the team that will help create a legacy plan, in most cases, serious art collectors have substantial expertise and knowledge about their collection. They also will likely have professional contacts that can point to resources or directly provide information, technical support and professional guidance.
While donors may donate their art collections wherever they want, one reason art museums are a prime candidate is a combination of “logical fit” — they have a reason to accept and display the artwork that will enhance a donor's legacy — and tax planning.
Museums often fit two critical criteria for maximizing tax deductions from gifts of artwork. First, a donor's charitable tax deduction is affected by the recipient's charity status (gifts to public charities get the highest tax deduction for artwork). Second, it matters how the beneficiary uses the gift. If the gift of artwork is used in a way related to the charitable organization's mission — the “related use rule” — then the tax deduction is based on the fair market value of the donated artwork.
When clients plan to gift their art to museums, financial advisers can help with the transition. Clients are naturally focused on how they see their collection fitting with the museum collection and shaping their legacy. But they may be less focused on whether the museum and its collection are a good fit for their desires. Advisers can help their clients achieve their legacy while avoid pitfalls by following these seven best practices.
1. Create a plan with your client, legal counsel and an independent art adviser that includes the donor's close family or other heirs as appropriate. Including family and/or heirs in the process can help clarify a donor's intent, prevent future conflict and actively aid in preserving the donor's legacy. The plan should include having the artwork professionally appraised by an accredited appraiser with relevant experience in the type of artwork being donated. The appraisal cannot be made earlier than 60 days before the donation. In cases where donors are concerned about whether the IRS may accept a valuation, such as when there are fluctuating markets for similar artwork, an IRS Statement of Value may be obtained for artwork valued at $50,000 or more to provide the donor with certainty.
2. Try to place artwork in museums that have missions and continuing collection interests that strongly align with your clients' intent and contents of their collection. Clients often will know of strong prospects. But clients focused and passionate about their collection may not recognize how their collection will best fit with a museum's broader collection, its goals and its limitations in space and other resources.
3. Consider art museum policies and practices for donors and “deaccessioning” (removing items from museum holdings, usually to sell them). Mr. Welch pointed out that “many museums want to retain the ability to improve their collections through the acquisition of better examples. In such a case, a gifted artwork might be deaccessioned and the proceeds used to acquire a superior work. When that happens, the donor's name of the original gift typically appears in the newly acquired work's credit line."
4. Consider museums that are members of monitoring or regulating associations. For example, the Association of Art Museum Directors requires a written policy for “deaccession principles, procedures and processes”. They also require that “funds received from the disposal of a deaccessioned work shall not be used for operations or capital expenses. Such funds, including any earnings and appreciation thereon, may be used only for the acquisition of works in a manner consistent with the museum's policy on the use of restricted acquisition funds. In order to account properly for their use, AAMD recommends that such funds, including any earnings and appreciation, be tracked separate from other acquisition funds.”
5. Check the health of organizational finances by looking at Form 990 tax filings and/or charity rating agencies like Charity Navigator. One quick test is to look at total assets and total liabilities. Stable charities — like stable businesses — generally have assets exceeding liabilities.
6. Consider supporting museum operating costs as part of a donor's commitment to their gift of artwork. Financially supporting the museum is another way of helping to preserve a donor's legacy and a logical step in a client's charitable, financial and tax planning.
7. As you draft an agreement for the gift, consider including a “statement of intent” that clearly and personally outlines the desires and expectations of the donor for their donation. Sharing this statement with family (and/or other heirs) and the beneficiary museum can help clarify intent, expectations and address any concerns of heirs or the museum. A statement of intent can also clarify donor intent for future generations and may help prevent legal challenges.
Donors who bequeath their art collections to museums share an intimate part of their lives. Advisers can help provide guidance that will preserve and protect their client's wishes, smooth the process and help establish their client's legacy for the benefit of future generations.
Hiram Wurf is charitable catalyst and managing director of The Advise Us Fund, an independent donor-advised fund and planned giving provider. Joel Schaffer is assistant vice president for Planned Giving at DePaul University.