Modern art, specialty cars, rare watches: Passion is usually behind the creation of a collection. Eventually, collectibles may also become investments, and they ultimately can become a part of your legacy that is passed on to future generations.
Turning your hobby into a meaningful legacy requires planning ahead to ensure your collection is preserved and passed down in the way you intend. This means making sure there is enough liquidity available to your heirs to cover costs such as taxes, maintenance, storage and other expenses. Without a strategy in place, part or all your collection might need to be sold by your heirs, sometimes in a rush and at diminished vale, to cover these costs. Without plans set ahead of time, the family tensions or conflict and improper management of the collection can erode the positive impact you were hoping to have on your heirs.
To avoid these issues, start by talking to your estate planning attorney and financial advisors about how to plan for your collectibles. Certain techniques may include giving ownership of items to your heirs now, often with tax advantages. For example, setting up a limited liability company to hold your collection can allow you to gradually pass portions of the ownership to your heirs.
Another option that may reduce estate taxes is taking advantage of the annual gift tax exclusion. This exclusion allows you to make tax-free gifts each year to as many recipients as you would like up to a certain dollar amount per recipient. For 2024, the limit is $18,000 ($36,000 for couples) per recipient. If your collection’s value is above this amount, making gifts of partial interests may be possible.
You can also use your gift and estate tax exemption to gift your collection free of estate tax. This is the total amount (above any annual exclusion gifts that you make) that you can transfer during your life or at death without being subject to estate tax. In 2024, the estate tax exemption is $13.61 million per individual ($27.22 million for a couple). An advantage of making gifts now is any future appreciation in value would be part of the estate of the recipient, not your estate, and therefore not subject to estate tax.
Choose an Executor Wisely
To preserve your collection beyond your lifetime, it is important to choose an executor who has experience managing collections like your own. Regardless of whether your collectibles will be sold or distributed, your executor will need to take possession of the items, store them and insure them against damage and loss. Depending on the collection, routine cleaning and maintenance may be needed to keep the items in pristine condition.
In addition, your executor will need to hire qualified appraisers to value the property for estate tax purposes. If your collection is to be sold, he or she might need to hire special advisors as well. So, it is important to choose an executor with the knowledge and ability to handle your collection properly. Also, make sure your estate has sufficient liquidity so your executor can pay the expenses associated with preserving, storing, and maintaining your collection.
Think Charitably
When family members do not share your enthusiasm for a collection or it becomes impossible to divide it equitably, a better choice may be to donate it to charity. The donation could offer significant estate tax benefits, depending on how the charity will use it, and you could even consider replacing its value in your estate with a life insurance policy. Proceeds from a life insurance policy can transfer to the next generation tax free while your collection can find a new home where it is admired and appreciated.
If you plan to leave your collection to a university or museum, a written “gift acceptance agreement” may be helpful to ensure you and the recipient agree on how it will be used. For tax deductions, the IRS requires a written appraisal for collectibles valued at $5,000 or more.
Collectibles also can be donated through a charitable remainder trust, private foundation and certain donor advised funds. Each offers potential tax benefits depending on your adjustable gross income and other factors. An experienced estate planner can help you decide which is right for you.
Start Today
These are just a few suggestions to help you plan ahead and incorporate your collection into your estate plan. Additional considerations may be necessary, depending on the particular items you collect, your family dynamics and the value of your taxable estate.
Collectibles can be the most valuable assets in an estate. What starts out as a hobby turns into a passion and eventually becomes a lucrative investment, built gradually over a lifetime. The best way to preserve the value of your investment, both for yourself today and for your heirs in the future, is to start planning today.
This material should not be construed in any way as investment, tax, estate, accounting, legal or regulatory advice. Any description of tax consequences set forth herein is not intended as a substitute for careful tax planning.
Charles R. Johnson, Wealth Director, Fiduciary Trust International is responsible for developing investment and trust relationships with families and organizations. He works closely with the Trust and Tax planning group to help clients determine optimal asset allocation and transfer strategies.