...the markets are at a stage where a single, second-rate Warhol or de Kooning could easily put you over that gift-tax exclusion threshold.From Barron's Penta:
Gifting the De Kooning
As the prices for contemporary art continue to soar, the valuable heirlooms hanging on the wall at home are posing a new set of issues for collectors and estate planners alike. Too often these precious artworks aren’t accounted for in the estate planning process, says Fiduciary Trust vice chairman Gail Cohen. “And that is the absolute worst scenario, because sometimes the works have appreciated so significantly they overwhelm the value of the [rest of the] estate,” she says. With no proper plan in place, the death of a savvy collector could expose heirs to a staggering tax bill.Willem de Kooning’s “Woman III” sold for $137.5 million in 2006.
Artnet’s C50 index, tracking the performance of works by leading contemporary artists from Warhol to Hirst, has nearly quadrupled this last decade. That means art collectors could be sitting on a massive windfall. Take out the party horns. But the flipside is that the combined federal and state estate tax exposure for a New York resident could come close to 60%. Not so good. Furthermore, that rate applies to estates exceeding the $5.3 million, and $10.7 million for a couple, when the markets are at a stage where a single, second-rate Warhol or de Kooning could easily put you over that gift-tax exclusion threshold. Heirs only have nine months to pay up. If they don’t have the cash, they’ll probably have to break up the collection, quickly selling off bits to pay the IRS tab.
To avoid this emotionally and literally taxing loss, a collector must, earlier on, choose to leave the artworks to his or her family, gift the collection to charity or sell the works outright. Assuming your children want your collection, you must decide whether to gift the collection during your lifetime or leave it to the family in your will. The answer to that is a numbers game that differs from state-to-state.
Imagine a piece of art is purchased for $1,000 twenty years ago and it is worth $14,000 today. If a collector is passing the artwork on in his or her will, upon his death, estate taxes would be paid on its fair market value, or $14,000. If the beneficiary were to sell the artwork, after squaring that tax bill with the government, they would then owe taxes only on any appreciation above $14,000.
In contrast, if the collector were to gift that piece in his lifetime, there would be no gift taxes levied. But when the heir sells the piece, capital gains taxes will be charged on the $13,000, plus any additional appreciation in value above $14,000....MORE
