A Family Approach to
Collecting

When you look at your collection, do you envision your
children and grandchildren enjoying it? Successful estate planning can help ensure the benefits of your collection can be enjoyed by your family for generations to come.

	Photography by © Peter Beck/CORBIS

When Dr. William H. Marshall decided to start collecting late 19th and early 20th century American paintings, his five children, all of whom were in high school or college at the time, had little interest in his activities as a collector or in the paintings he was collecting.

It wasn’t until years later, when Dr. Marshall put the collection — which currently contains more than 100 works and is considered to be one of the most significant privately owned collections of American impressionist and Midwestern regional painting — on tour to several museums that they began to change their minds.

“I think what really impressed [the children was] when they saw the collection in the museum, in exhibit mode,” the 78-year-old retired surgeon says. “I think that was impressive to them. It was also the first time they had seen all of the works together, so that made an impact as well.”

Today, all five of his children, along with Marshall and his wife, Nancy, are part of a family limited partnership, designed to effectively transfer the unrealized value of the collection to the next generation while minimizing the potential tax liabilities associated with the transfer. Created a number of years ago, the Marshall family partnership owns approximately 60% of the paintings in the overall collection. Each year, Marshall and his wife assign the maximum percentage of control over the partnership allowable under IRS rules to their children, thereby transferring both the wealth inherent in the collection and the family identity that comes from owning fine art.

“My major assets are in farmland and my art,” Marshall says. “So the limited family partnership was set up to transfer that wealth. Technically, the trust is handled by two of my sons. I am just the art consultant. But the partnership is designed to serve two purposes: to transfer the wealth and transfer the art.”

Planning for the Future
Beyond simply deciding what objects to collect and how to take care of them, planning how to transfer art and collectibles to the next generation can be one of the most critical aspects of building and maintaining a successful collection.

“It’s important to realize that an art collection is a financial asset,” says Pablo Schugurensky, one-time director of Microsoft’s art collection and founder of Meta Arte, a Seattle-based art consultancy. “There are several aspects of value in art and collecting, and the most visible are usually the emotional qualities. But you have to look at it, at times, from an analytical perspective, to understand [collecting] has financial and tax implications.”

Understanding the real value of your collection is important. You need to consider your art and collectibles as part of your overall financial and estate plans, especially in relation to other assets, such as real estate or investments. Deciding where the collection may reside after it passes from your control — be it with an institution such as a museum, a family member or another collector — also is a key consideration. And, in the light of potential tax and other financial liabilities, deciding on the best strategy early on can be critical in valuing and transfering your collection.

Strategize With Your Family
“From a family perspective, I think the most important element is determining ‘What’s the appropriate thing to do?’ and ‘What is the family’s level of interest in the collection?’” says Hugh Magill, Senior Vice President and Group Head of Personal Fiduciary Client Services at Northern Trust. “Does the family really treasure the collection the way the collector does? Can they afford to preserve it? Often, family harmony can play into these decisions.”

Even if your children lack the interest or the means to maintain your collection intact, planning is important. For example, if you intend to leave your collection to your children and know they may need to sell part or all of it, you may want to wait until your death to make the transfer. Why? Art and collectibles are not eligible for the favorable 15% capital gains rate that applies to most sales of financial assets. Instead, they are taxed at a higher long-term capital gains rate of 28%.

“One of the few remaining benefits of our tax law is that appreciated assets receive a step-up in basis upon death,” Magill says. “So if you bought a painting for $1,000 that is now worth $100,000 and leave it to your heirs at your death, they will receive a step-up in basis. Even if they turn around and sell the painting immediately, they will not owe capital gains tax on the sale.”

	Photography by Seth Joel/Getty Images

Choose the Right Structure
Often, the family’s overall financial needs may help determine the specific vehicle chosen to transfer all or part of a collection from one generation to another. Questions concerning whether children will have the organizational and financial resources to care for a collection and whether there will be sufficient wealth to bequeath an inheritance outside of the collection itself may have to be worked out. Fortunately, a number of sophisticated financial strategies exist that can help you create a plan to meet your family’s needs.

“For example, there are strategies I call ‘modified split interests trusts,’ such as a charitable remainder trust, or a charitable lead trust,” Magill says. “It’s possible to use variations of these trusts for transfers of artwork. In a charitable remainder trust, a life estate is created for a child or a spouse. The artwork is used to fund the trust, and then after a term of years, if the artwork hasn’t already been sold, the remainder passes to charity. In a charitable lead trust, artwork is donated to the trust and can then be loaned to a museum for use in its collection for a period of years, at the end of which the artwork passes to the children. Both of these strategies — and others — can be used to help transfer wealth between generations effectively.”

Make an Emotional Connection
Regardless of whether your children have an interest in your collection, decisions you make about how to dispose of it can be emotional. One key to making sure a collection doesn’t damage family harmony is to work toward open communication and look for creative ways to include family members in your decision-making process.

“I’ve seen cases where collectors are committed to an institution because they see the value in keeping an entire collection together,” says Shugurensky. “But they also are aware of the emotional value of the kids having grown up with the pieces. So they might suggest to the children that they may choose, for example, one piece for themselves, and then try to equalize the rest of the estate before working on the rest of the collection with the institution.”

For Marshall’s family, finding meaning in his collection before it formally passes from one generation to another has been important.

“I just felt after the collection came home [from the museum tour] — and we had 50 or 60 pieces then — I should let the family enjoy them,” he says. As a result, the children each have a few paintings they’ve chosen hanging in their homes. One of Marshall’s sons, who likes to play the piano, has a painting from the collection by an artist who was so poor that he painted his art on sheet music. Marshall’s daughter, who lives in California, chose paintings of Midwestern winter scenes to remind her of snow. And his 10-year-old granddaughter, who wants to be a ballerina, has a painting hanging on her bedroom wall of a ballerina taking a bow.

“Some of the paintings I might like to have, but it’s much more meaningful to [the children],” Marshall says. Which makes letting his collection go just a little easier.