NAEPC Webinars (See All):

Issue 43 – December, 2023

Avoiding the Pitfalls: Practical Tips for Today’s Collectors

By Taylor Strander

Recently, Heritage Auctions’ Trusts & Estates Department was approached by an heir who had inherited half of his father’s comic book collection and wanted to know what the sale potential and market value was for his inheritance. The comics turned out to be wonderful examples of some rare and excellent condition Golden and Silver Age comics from the 1940s through 1960s. Heritage marketed the collection extensively and ended up selling the comics at auction for over $800,000. When we asked the heir about the other half of the collection that had been left to his sibling, he told us the all-too-familiar story of the other half having been sold locally for less than $15,000. His sibling’s disinterest and lack of knowledge about the value potential for the collection resulted in a significant loss of inheritance — surely not their father’s intention.

This real-life story illustrates the common issues that arise when collectors do not properly plan for the future of their prized collections. It is estimated that art and collectibles make up approximately 10% of ultra-high-net-worth individuals’ balance sheets.[1] While a vast amount of wealth is held in the form of tangible assets, the reality is that most legal, financial, and tax professionals do not advise their clients on planning techniques for these complex assets. Moreover, some advisors may not even ask their clients what they collect.

This lack of communication is two-fold. In the example above, the collector’s heirs were not properly educated on the value of their father’s comic book collection. Despite the fact that tangible assets make up a sizeable portion of a person’s net worth, many collectors fail to treat these objects as a meaningful investment. Many collectors keep their families in the dark regarding scale and nature of their collecting; there are many reasons for this but consider taking a longer view. Have you thought about the effect that your sudden death or incapacitation might have on your collection? What would you expect from your heirs? What should be done with your collection? Should it be sold? Distributed among family members? Some combination? What will remain after taxes?

If transferring your collection to the next generation is desirable, you will want to provide for an orderly transition. If your family doesn’t share your love of collectibles, you will have to decide whether to dispose of the collection in your lifetime or leave that decision to your heirs. If the latter, your family should — at a minimum — have a basic understanding of your collection, its approximate value and how you want it distributed. Let’s take a deeper dive into five practical tips collectors should follow when planning for the future of their art and collectibles.

Let’s begin with the simplest, but oftentimes most neglected tip: communication. Talking with your heirs about the wishes you have for your collection after your death is key to ensuring a seamless legacy transition. If you cannot allow yourself to share this information with your whole family, choose one trusted individual — perhaps the person you are considering to be the executor or trustee of your estate.

During their lifetime, collectors should seek counsel from trusted legal, financial, and tax advisors to create a proper succession plan. Tax laws are always changing, and it is wise to update your estate plan at least once a year and meet with your team of advisors on a regular basis.

A collector cannot plan for the distribution of his or her collection without a proper inventory. Documenting what you own by simply writing it down by hand or digitally is the most fundamental part of intelligent collection management. Regardless of the method, a proper inventory should include basic details about each object (i.e. artist, title, date, medium, and size), photographs, the manner of acquisition, the cost and date of acquisition, and the object’s location. The more detailed, uniform, and decipherable, your inventory can be to the novice eye, the better.

Maintain a second copy of your complete inventory, including photographs, in a different location from the collection itself. Safe deposit boxes in banks are recommended, and it also is a good idea to have an electronic copy stored online.

When selling or appraising a collection, provenance is an essential factor that influences an object’s value. Evidence of an item’s history of ownership including invoices, auction catalog entries, and bills of lading help establish authenticity. Collectors should keep a complete record of an item’s history and chain of title to ensure their treasures achieve the highest value at the time of sale.

Qualified Appraisals
The appraisal of collectibles and other tangible personal property is an integral part of estate planning. Appraisals are required for estate tax, charitable contributions and gift tax purposes, as well as for divorce settlements and many insurance policies. While every appraisal is unique, all appraisals should enlist the services of a qualified appraiser who can prepare an appraisal report following the Uniform Standards of Professional Appraisal Practice (USPAP). USPAP serves as the source of appraisal standards and qualifications published by the Appraisal Foundation, which is authorized by Congress. It may be necessary to speak with several appraisers before choosing one with the expertise that is required. Heritage Auctions Appraisal Services, Inc. can assist with finding a qualified appraiser either from our in-house experts or from our network of ethical professionals.

IRS regulation 170(f)(11)(E)(ii) defines a “qualified appraiser” as an individual, who (1) has earned an appraisal designation from a recognized professional appraiser organization, or has otherwise met minimum education and experience requirements set forth in regulations prescribed by the Secretary, (2) regularly performs appraisals for which the individual receives compensation and (3) meets other such requirements as may be prescribed by the Secretary in regulations or other guidance.

It is also crucial that collectors understand the different definitions of value. For example, insurance appraisals are generally based on retail replacement value (RRV), or the amount it would cost to replace an item with one of similar quality in a retail venue in a reasonable period of time. Unlike the RRV used for insurance purposes, the value for tax purposes is the work’s fair market value (FMV) at the time of the transfer, either during life or at death. FMV is determined through a hypothetical sale in the market where the artwork is most commonly accessible to the public, such as an auction.

Rely on Trusted Experts
Never underestimate the power of an expert team. Collectors should familiarize themselves with dealers, curators, appraisers, auction house specialists and other experts who specialize in their collecting field. These professionals can provide invaluable information on buying, selling, current market prices, and other collection management advice. It goes without saying, but your team of experts should also include a trusted legal, tax, and financial advisor.

[1] Credit Suisse Research Institute, June 2022.