Art Letter (4/15/09)
Our Collections Need Our Attention - Lessons Learned
I've learned a lot that's relevant to collectors and artists since opening the Chicago office of the Briddge Group, who some of you probably know as the country's leading Art Succession Planners, while working closely with its founder, Michael Mendelsohn.
Maybe I should define Art Succession Planning first. While it may be confused with estate planning, planning for art, antiques and other collectibles focuses on the collector's legacy and a fair and equal distribution to heirs. Though included, it is not driven by how much we can save on taxes. Almost all of us collect something. We are all proud of what we collect, be it art, first edition books, barb wire or fire engines. To many of us collectors, our collections have more meaning, more satisfaction and more pride than anything else we've done with the exception of being a parent. When we get to be a certain age we make plans for our assets with wills, life insurance polices and estate planning. One of the things I've learned is that most people, as prideful as they are of their collection, do not make any plans for what happens to their collection. That is what Art Succession Planners are for.
Okay, so here's what I've learned: (I'm going to direct this mostly to collectors, but artists and others can readily extrapolate.)
People Are Well Intended: That's a nice way of saying people can be lazy. One of the most important things a collector or an artist can do is to have their Art Succession Planning team create an accurate record of everything in the collection; when the item was purchased, how much was paid for it, how it was acquired, its history, how you feel about it, and how much it is worth at the moment. And then this should be updated periodically. We may know 90% of this in our heads, but when we're gone . . . what do our heirs know? All by itself, this historical reference catalog will boost the value of the collection now and in the future.
People Procrastinate - Frequently until It Is Too Late: I'm seeing this way too often. I doubt any of us look forward to dying. We put off making plans continually. Because life is short and art is long we very rarely address what to do with our collection. Look at the consequences. We die. Our collection hasn't been planned for. Our kids call one of our attorneys. And they say "Put it up at auction." There's no time to do much else. The government says our heirs have 9 months to settle the estate. I bet most of us are conditioned to think that's just fine. But, do the math. Let's deal with round numbers. Say your collection is worth one million dollars and the estate tax deductions have been used up. Your heirs put your collection up at auction. By the time they are paid they will likely have given up 80% of the collection's value. (At least 30% goes to the auction house in commissions, fees, insurance, photography and shipping. Then the IRS steps in. They get 45%. And the state - up to 7%.) That's of the total value; not the net proceeds. Assuming everything sold, the $1,000,000 collection nets the heirs less than $200,000! And of course, everything doesn't sell. This is dreadful.
Collectors Typically Want the Integrity of their Collection Maintained: Of the collectors I've worked with, most know they've created something special, something that reflects who they are and what they believe. That's special and constitutes a legacy; a legacy that could enable our heirs to understand more about us - through our collection. We want our vision perpetuated. I understand that. If we think we've made a difference it's meaningful that those who come after us know about it. Creating a family art legacy makes that happen. And though making a gift a collection and endowing a museum is a beautiful thing, it doesn't happen by itself, especially if the act of dying without a plan distributes the collection to the winds.
Most Heirs (Kids) Have No Interest in the Collection beyond How Much Money it Can Get Them: I love the story the Briddge Group's President and Founder, Michael Mendelsohn tells about his daughter: Marni is my youngest child so she grew up living with our collection. She experienced the excitement as we acquired new things and our rooms were increasingly dominated by folk art. She was there when we had art-related events in our home to raise funds for charities. We have taken her to museum openings and to shows at major museums that included our things. Marni is the one of our three children who had our collection as an active force in her life. Several years ago, I asked Marni if she could choose any five things from our collection, what would she take. She went around the house, and about a half-hour later, came back with a list of five of the most important pieces. And then she said that she chose these pieces because she'd make the most money when she sold them.
The Vast Majority of Collectors Have Not Spoken with their Children about What They Want Done with their Collection: Often we assume, incorrectly, that our kids are going to want our stuff. If they do, we should find ways to transfer it to them while we are alive, thereby avoiding significant estate taxes. But think about the items your parents left, or will leave, you. How much of that, beyond the sentimental memento do we want to keep and display? So if the kids are interested in the value, but not the item, aren't we, and they, better off maintaining the integrity of the collection while using it as a means to get them the asset they want, without reducing the collection's value through poor or non-existent planning?
Our Advisors invariably Do Not Ask What We Collect: Estate Planning attorneys do wonderful things for us and our kids. It's about preserving wealth and passing it on to the next generation(s). In this structured age of digital technology they tend to work from forms. They have intake questionnaires. They sometimes ask if we collect anything, and invariably collectors get humble here, don't know the value of their collection and throw out an insufficient number reflecting their collection's worth. The Estate Planner then enters that number in the blank marked 'other' and moves on. All this information does, in this unfortunately too typical a scenario, is to add to the bottom line, but does nothing to honor the significance of the collection or its nature as a special asset. We'd be a whole lot better off if our various advisors and Art Succession Planning team were integrated and showed us the array of intelligent options the future of our art holdings can afford us.
Collectors Normally Have No Idea What their Collection Is Worth: As a collector, and former art dealer, I know from myself, and from others, that we rapidly forget how much we paid for something. Over time, unless we are in buy or sell mode regarding a specific artist, we don't know how much the stuff we have is worth. Most of the time that's just fine. Our collections are not about how much money they are worth; it's about the emotional, spiritual or other attributes we attribute to it; until of course that collection's value is, for the moment, more important than anything else - and then it is too late to plan accordingly to protect the collection from the tax man.
Often Collectors Do Not Realize the Consequences of "Quietly" Passing Art to the Next Generation: I have a painting a friend gave me just before he died 30 years ago. It was valuable then and is very valuable now. I have no paper trail, no receipt, and no evidence that it wasn't stolen. Furthermore, no death taxes were ever paid on this painting. Those, of course, are still due. There is no statue of limitations on avoided estate taxes. Damned nice painting, but this could clearly be a problem some day. It is better to be upfront and honest, give the government its due and not burden our heirs with fuzzy legalities.
Many Collectors Do Not Know or Question if their Title Is Free and Clear: If it happened to Steven Spielberg it could happen to me. (From the Associated Press) "Russian Schoolroom," a (Norman) Rockwell painting stolen from a gallery in the St. Louis suburb of Clayton, Mo., more than three decades ago, was found in Oscar-winning filmmaker Steven Spielberg's art collection, the FBI announced Friday. Spielberg purchased the painting in 1989 from a legitimate dealer and didn't know it was stolen until his staff spotted its image last week on an FBI Web site listing stolen works of art, the bureau said in a statement. Do you know if title to your art is really yours?
Collectors Often Do Not Keep Good Records: In a recent article, the Briddge Group's President, Michael Mendelsohn, wrote. A collector died having kept no documentation of his extensive collection of Russian impressionists. At the time of his death, the collection was put into a storage facility and the collector's son and daughter were each given a key to the unit. They were told to wait two years before removing any art from the facility. About 20 months later, the daughter went to the storage facility to have the art appraised. When she entered the storage unit it was completely empty. She called her brother inquiring about the paintings and he said to her "What paintings?" She asked the probate attorney and he said "What artwork? I have no records of any artwork." Other than her key she had no proof that any art was ever in the storage unit. Worse yet, she may end up paying penalties for artwork fraudulently transferred if she blows the whistle on her brother.
Collectors Don't Have an Art Trustee: Aren't these the important things in our lives; our spouse, kids, assets and our collection? We have advisors or trustees for those who can't adequately fend for themselves, like our minor aged children and our investment portfolios. What about the art, or our collection? Who is there to see that our interests are preserved, that the core integrity of the collection is preserved and protected?
Most Collectors Don't Realize they Can Use Their Collection to Fulfill Their Philanthropic Interests: What if you could hone your collection and remove say the 15% that doesn't quite fit, or the 10% whose quality is not as good as the balance? Let's say you sell that material and use the proceeds to take out a life insurance policy that benefits the charity of your choice as a promised gift. Smart, eh? But even better, by working with your Art Succession Planning team and your financial planners there are myriad ways to do a lot better than that. Trusts, Charitable Remainder Gifts, Bargains Sales, all kinds of things.
In Conclusion: I've learned a lot about people, particular those who collect. Our collections are important and meaningful to us. They are a silent asset as well as a unique asset, entirely different from real estate or stocks and bonds. They even have their own tax rates. Obviously collections are special.
The world is too complicated a place for most to be able to figure out the best way to protect our investments, or assets and our children. That's why we have advisors to help. And that's why, those of us who have collections we care about, need to bring an Art Succession Planning team into our group of advisors.
And as prone as we all are to procrastinate, here's a gentle nudge to encourage you to take care of who and what you love.