If you’ve inherited artwork or an art collection, and you have reason to believe the art could be valuable, some immediate due diligence can save you a long tax debate with the IRS and preserve your inheritance, as you determine whether to sell or to keep it.
Step 1: Get Insurance Specifically Tailored for Art Work or Art Collections
Your typical homeowner’s policy covers damage to the structure and some coverage for contents. However, you may be surprised to find out about exclusions or limitations on coverage for artwork and art collections.
We encourage you to contact your insurance broker for an agent that specializes in insuring fine art. If the worst happens, the last thing you want from the insurance company is a “claim denied” letter.
Step 2: Time to Buy Some Three Ring Binders
We recommend getting a three-ring binder or file for each piece of art and keeping every document you have about that piece of art in the art collection in the binder. Keeping PDF copies of those documents is a good idea too.
What documentation concerning the art should you keep? Answer: almost everything! Documentation is critical for an insurance claim and helps support the value of the artwork or the art collection when sold.
Examples of documentation that you should keep:
- Invoices / purchase / sale documentation / any documents relating to ownership
- Fact sheets describing the artist or the method of creating the artwork
- Conservation treatment reports
- Certificates of authenticity
- Contact information for people generating documents listed above
Step 3: Make That List and Check It Twice
It is time to make friends with a spreadsheet or someone who is good with spreadsheets! If your art collection is large, your insurance broker can put you in contact with a professional collections manager or registrar.
Common items in an art collection database for each piece of artwork:
- Index or identification number
- Name or description of the artwork
- The physical location of the artwork or art collection
- Most recent valuation
- Date of most recent valuation
- Insurance coverage amount
- Contact information for the insurer
- Any pending ‘To Do’ items for the art (e.g., conservation work, appraisal, etc.)
- Miscellaneous notes
The author confesses to having an accounting and Microsoft Excel background, but protests that the purpose of this is to preserve the value of your art collection!
Step 4: Establish Your Tax Basis In Inherited Art Collection or Individual Artwork
When you inherit artwork or an art collection, ask the Executor of the estate for a copy of the date of death appraisal for the artwork. In many cases, this date of death valuation will be your income tax basis in the artwork. The higher your income tax basis the better!
Here’s an example:
You inherit a minor Rembrandt from Uncle Warbucks. You have a date of death appraisal that values the painting at $200,000. 2 years later, you sell the Rembrandt for $300,000. Your taxable gain is equal to the sales proceeds ($300,000) less your tax basis in the artwork ($200,000), in this case, $100,000 ($300,000 minus $200,000).
The IRS has a nasty habit of arguing that if a taxpayer cannot establish their tax basis in property then the tax basis of the property is zero ($0!) and the ENTIRE VALUE of the artwork is subject to income tax upon sale.
Artwork and collectibles are taxed at a 28% capital gains rate, NOT the typical 15% capital gains rate on assets such as stocks and mutual funds as of 2018.
Step 5: Set An Appraisal Schedule for Each Piece of Artwork in the Art Collection
Some pieces of artwork do not have regular fluctuations in value. However, some pieces of artwork, e.g., post-war and contemporary artwork or art collections can change in value, not unlike certain internet technology stocks that shall remain heretofore unnamed!
Talk with your insurer specializing in artwork about a good schedule for getting appraisals done. You don’t want to be underinsured when the water main above the artwork bursts.
Maintaining an art collection and artwork is a lot of work! We hope this article has been helpful and encourages you to get in contact with artwork professionals if you are the lucky beneficiary of valuable artwork!
This is a guets post by Mike Carroll. He is an Estate Planning Attorney with over 30 years of experience in asset protection. Mike is a partner at Thrash, Carroll & Vanway Law Group in Austin, Texas, and a regular contributor to the firm’s Attorney Insights blog.