What should you do with your art collection?

Whether you collect watercolors or Persian rugs, the questions are the same: Do you want to donate them? Leave them to your heirs? Either choice will affect your taxes and more. Here’s what to consider.

20 Jul 2017

Collecting art, like creating it, comes from passion, which is why collectors often focus more on their aesthetic and emotional connection to the work than its impact on their estate. “Many people think of art as personal property, not as a financial investment,” says Bonnie Park, Executive Director and Head of Preferred Planning at UBS Financial Services. “This can cause unintended consequences for the collector and their family and friends.”

Many people think of art as personal property, not as a financial investment. This can cause unintended consequences for the collector and their family and friends.

– Bonnie Park

Key takeaways:

  • The value of your art collection should be considered in your overall financial plan. Work with your Financial Advisor to create or review your plan.
  • Get a fair market value appraisal for your collection.
  • Work with a tax professional to determine potential deductions for charitable donations.
  • Examine the potential tax implications of giving art to heirs while you’re alive versus leaving it in your estate.
  • Get input from your heirs, an estate attorney and your Financial Advisor to help you find a plan for your art collection that aligns with your personal and financial goals.

If you collect art, Park says, it’s important to spend some time considering who should inherit the works and whether you want to distribute them during your lifetime or after you’re gone. Most collectors donate their pieces to charity or leave them to their heirs rather than sell them; each choice comes with a variety of tax implications. The following steps could help you make decisions that feel right financially as well as emotionally:

1. Properly valuing your collection

First, have your collection evaluated by a qualified art appraiser—one affiliated with a professional organization such as the Appraisers Association of America or the International Society of Appraisers. The IRS may require an appraisal whether you donate the art for a tax deduction or pass it down to heirs. Note that the appraiser needs to determine the collection’s fair market value, defined as the reasonable amount that a seller and buyer would exchange for each piece today, rather than the replacement value for insurance purposes.

2. Giving to charity

If you want to share art with your community and receive a potential tax deduction, you might consider donating your collection to a charitable organization. The following factors may also affect your decision:

  • Public versus private charities. Donating art to a public charity such as a church, hospital or public museum may qualify you for an income tax deduction for the full fair market value of the piece. However, if the work has a claimed value of more than $5,000, and is put to “unrelated use” by the charity—meaning, it doesn’t directly contribute to the organization’s mission or it is simply sold for monetary value to support the charity—it’s possible you won’t be able to claim the full amount of the donation1. And donating art to a private charity, such as a private, non-operating foundation, may limit your deduction.
  • Your ownership history. You may be eligible to receive a deduction on the full fair market value of donated art if you purchased it and have owned it for more than a year, depending on the type of charity and how to use the art. You may receive a smaller deduction if you created the art, if it was given to you by the artist or if you owned it for a year or less.
  • How the charity will use the art. Your deduction may be limited to the price you originally paid for the art—rather than the current market value—if the charity sells the work to raise funds for operations rather than using it directly to further its mission, such as an educational charity that hangs the art where children can learn from it1.

3. Giving to your heirs

In your plan to pass down your art to heirs, examine the estate tax implications of different strategies.

Gifting pieces of your collection while you are alive can reduce the size of your estate and thus any estate tax. But gifts worth more than $14,000 per person, per year, will use a portion of your lifetime estate tax exclusion—the amount you are allowed to give away without its being taxed—which is why the IRS requires a recent appraisal for any art you gift.

Leaving your collection as part of your estate can provide different tax advantages. In particular, as is true of some other inherited assets, if heirs sell the art, they won’t have to pay capital gains tax on any appreciation during the time you owned it. However, dividing a collection fairly among multiple heirs can be difficult.

You have a number of options for managing the financial implications of giving away your art. Connect with your Financial Advisor, as well as your family, an art professional and an estate attorney, about your plans for gifts, your estate planning and your personal goals to create a plan that fulfills your personal and financial goals for the art that you’ve spent your life collecting.