Preserving A Legacy, Protecting A Tax Deduction
Michael Mendelsohn
As we enter the final quarter of 2008, you may find that you are in a position to advise your clients who own collections about the art of giving. It doesn’t matter whether the collection is comprised of art, wine, books, coins or cars; giving a piece of it away will require careful planning. I have personally given away pieces of my art collection, and it required as much expertise, time and patience as it took to build the collection in the first place. During the gifting stage, the art succession planning team will be more invaluable to the collector and their professional advisors than during the many years of formulating and developing the collection.
Your client’s collection should be carefully examined and graded on a quality scale. A collector who gifts pieces from the top-tier of a collection is usually donating more for the formation of a family art legacy than the tax deduction. This requires a personalized strategy with a team of players. To structure a successful donation plan, the interaction of the following people need to be on the same canvas: the client, attorney, accountant, financial planner, qualified appraisers for each part of the collection, and a whole host of museum personnel, all doing the proper job to satisfy the IRS requirements. At this time, your client needs the assistance of their art succession planning team to make sure their prized possessions will find the right home. Most often this will be a museum where the gift may be preserved, exhibited and studied by future generations. When deciding what place is best for a piece of the collection, don’t forget to consider museums at universities.
Gifting from a lower tier requires a different set of strategies and needs to be handled differently than top tier donations. Your client is usually gifting to create a current income tax benefit in the form of a charitable deduction. It is here that the advisory team needs to understand how the client’s tax benefit can be used to increase their investment portfolio, purchase financial products needed in overall estate planning, and gift to charities. These additional opportunities create happy clients, and increase the sphere of work your client and their family will need. That win-win situation also increases your bottom line.
Regardless of where on the grading scale the donated piece falls, it is important to understand the related-use rule and how it affects your client’s tax deduction. If the intended organization has no art-related function or purpose, the deduction will be allowed for the cost basis only. Hospitals, religious organizations and schools may fall into this category. On the other hand, if the institution receiving the gift is a museum, historical society, or an organization supporting the arts, the donor will be entitled to a deduction for its fair market value, determined by an appraisal by a qualified appraiser.
Before the Pension Protection Act of 2006 (PPA), a donor of appreciated art, antiques or other collectibles to a qualified charity was entitled to a charitable deduction equal to its Fair Market Value (FMV). Then, the PPA added Section 170(e)(7)(A) to the Internal Revenue Code that, when applicable, puts a limit on the deduction. Under 170(e)(7)(A)’s limitation rule, a donor of appreciated artwork is limited to a deduction equal to his or her basis in the artwork, not the FMV, if the donee charity disposes of the property within three years of contribution. This makes it imperative that all parties in the gifting process understand that the intention of the donor is not to have the organization dispose of the artwork within three years of the donation.
Your clients may wish to give a gift of future interest or promised gift. While they can enjoy a recognition party that may be given for them, they will not be entitled to a current tax deduction. However, if and when the fractional gift changes incorporated in the PPA are modified, this may entitle the tax payer to a current deduction based upon the fractional piece given and in the future, on the promised fraction not given currently.
When donations are not pre-arranged, an art succession planner can be quite instrumental in finding the appropriate and willing institution for the gift. This is most important when dealing with the top tier of a collection or an entire collection. An example of poor planning was recently profiled in the Wall Street Journal’s article titled, “Stripping the Walls to Cover the Bills.” The article detailed what happened when the University of Iowa’s Museum of Art was considering de-accessioning its most important work, Jackson Pollock’s 1943 Mural, in case money was needed to cover the cost of repairs after heavy floods damaged parts of the campus.
I assure you that in the spirit of this generous gift of the Pollock, it was never the intention of the donor to have it de-accessioned, especially to cover maintenance bills. This points out the importance of adding an art succession team to the advisory team when art is to be given away so the intentions of the donor will be kept both now and in the future.
Donating art, cars, wine, coins, gems, antiques and collectibles to a charity can fulfill many goals for clients. Among them: create tax advantages, satisfy philanthropic goals, and in many cases maintain the gift for future generations to enjoy. The best advice I can give you is to keep in mind that all transfers must be approached carefully and knowingly, with well-written documentation. This will ensure the goals are fully met and no unintended consequences are triggered, both now and in the future. The choice is yours to offer your clients; be a tax payer or a philanthropist.
Michael Mendelsohn is president of The Briddge Group, an art succession planning firm, comprised of a variety of experts, who work in full partnership with both collectors and wealth advisory teams. Visit The Briddge Group website to learn more about art succession strategies, the team approach and to sign up for a free advisory newsletter: www.BriddgeGroup.com |
