The Art of Gifting: Top 10 Issues with Owning and Gifting Artwork

Owning artwork is not only a cultural indulgence, but sophisticated art lovers also recognize its potential to be a wise investment. McManus & Associates, an estate planning law firm headquartered in the Tri-State Area with over 20 years of experience representing individuals and families throughout the U.S. with interests around the globe, today shared the “Top 10 Issues with Owning and Gifting Artwork” as part of its Educational Focus Series. During a conference call with clients, the firm’s Founding Principal and AV-rated Attorney John O. McManus recently highlighted important considerations for artists, dealers, investors and collectors related to the ownership and transfer of art. To listen to the recorded discussion, visit the firm’s website at http://bit.ly/1hu0gEC.

 

1.     Putting a Price on the Priceless. Original works of art may be an investment in the owner's quality of life without ever addressing its monetary value but, before a transfer plan can be consummated, a fair market value of the artwork must be established.

 

2.     Business – Not Beauty – Is in the Eyes of the IRS. Whether you are in the "business" of the art world versus being a private collector can have a significant impact on income tax deductions.

a.      Costs associated with conserving, restoring, maintaining and transporting art may be deductible for an artist, dealer or investor if they are incurred as normal and ordinary business expenses or if they are incurred in the production of income. Art collectors are limited in the deductions they can take for these typical expenses.

b.     The IRS uses facts and circumstances tests with regard to classifying the owner’s status. If you want to be classified as an investor, you must be able to show the sale of art for a profit.

c.      Most individual owners are collectors who appreciate art and accumulate it for personal enjoyment. Collectors can enjoy favorable tax treatment when selling or giving away artwork.

3.     The Broad Strokes of Gifting Artwork. Collectors can enjoy the benefit of avoiding capital gains tax on a low-basis asset by donating artwork.  

4.     Till Death Do Us Part...with Our Art. Artwork can be enjoyed during the owner's lifetime, delaying the transfer until after death to a charity.

5.     The Beauty of a Private Foundation. Not only a charity, but a Private Foundation may receive the remainder interest of the Charitable Remainder Trust and/or other donations that a collector may wish to make during their lifetime and in their estate plan.

6.     The Artistic Genius of a Family Trust. A Family Trust that is created can purchase the artwork in exchange for a promissory note for 100% of the current value of the art, effectively removing it (and its appreciation in value) from the grantor's estate for estate tax purposes.

7.     Look Out, Louvre! Opening a private museum opens doors to tax deductions, permits the donor to regularly view the pieces of art, and allows friends to attend viewings, as well.

a.      Creating a tax-exempt exhibition space allows the founder a deduction of the full market value of any art, cash and stocks donated to the private museum.

b.     The IRS has issued rulings that the private museum may be located in close proximity to the founder’s home, but must have adequate signs and advertise so that the public good is served.

8.     Yes, van Gogh...We Can Transfer Just a Piece of the Art! Recent court decisions allow joint owners with a fractional ownership interest in a piece of art to give that fraction away at a reduced value for gift tax purposes.
 9.      Portray Your Family Mission. Donating art to a Family Foundation, and thereafter selling pieces to charities and collectors, allows the Foundation to be funded with financial assets (including equities) to support the family's mission of altruism and philanthropy long beyond the collector's lifetime.

10.  Share the Wealth of Cultural Enrichment. When a sale is not needed to fund the Foundation, consider spreading the love of fine art by donating artwork directly to a museum or university.

 

For guidance on how to maximize your ownership of artwork from an estate and tax planning perspective, call McManus & Associates at 908-898-0100. For more information on award-winning McManus & Associates, go to www.mcmanuslegal.com.