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Planning for the future of an art collection

Andrea Tardy is a managing director of JPMorgan Private Bank and head of its wealth advisory group in Europe, Middle East and Africa.

What future do you envision for your collection of art or antiques? Should it stay in the family or become part of the nation's cultural heritage? Andrea Tardy reports

Whether you have inherited a collection, or assembled it yourself as a passion or an investment, providing for its future requires careful planning. Works of art can be tricky assets to transfer or sell, and the related tax issues can be burdensome. The more valuable the collection, the more important it is to have a coherent strategy for the future.

Keeping art in the family
When a collection has been held for generations, senior members of the family often assume that they should continue the tradition by passing it on to the next generation. Art lovers who have built their own collections may likewise see works of art as a precious legacy to subsequent generations.

It is certainly true that inheriting great-grandfather's Degas or mother's David Hockney can be a deeply enriching experience that strengthens an individual's sense of connection to the family's love of beauty. On the other hand, great art can also be a millstone around an heir's neck.

Works of art are illiquid assets generating little or no income. Maintenance costs – insurance, security, storage, framing, environmental controls, restoration services – are often substantial.

In many jurisdictions, taxes can add significantly to the cost. In the UK, where the inheritance tax rate is 40%, an owner hoping to keep a collection intact and in the family will need to provide heirs with enough liquid assets to pay the tax. In some circumstances, it is possible to transfer works of art without incurring an inheritance tax liability, but there may be a charge to capital gains tax of up to 40%, so the bill can be truly staggering.

Other jurisdictions are different. Italy, for example, has neither a wealth tax nor an inheritance tax to worry about.

For residents of France, art is exempt from that country's onerous wealth tax, but it may be subject to French inheritance tax at rates up to 40%. Only historical monuments (ie, specially designated real estate, furniture and art works) are exempted from inheritance tax, and these must be open to the public.

The market for a given type of art is relatively small and easily flooded by works of a particular kind. As a result, some estates have been forced to sell works at fire-sale prices. Other estates have had to retain works they wanted to sell because prices were so depressed.

Does the next generation want it?
Passion for art is often contagious – but not always. Many in the art world were recently shocked when the adult son of a leading dealer in 20th century art rose to speak at his father's funeral. Instead of praising his father's prescient taste in art or his loyalty to rising artists, the son spoke with great bitterness about his own youth. When other boys were out playing sports, he was dragged to museum after museum to stare at art.

Before formulating future plans for their collection, parents should first find out how their offspring feel about the art. Do they love it? Will they devote the necessary time, energy and money to keep it up? While parents won't always comply with their children's preferences, they should certainly take them into account.

Keeping a collection intact
Today, as in the past, aristocratic families in the UK often keep their art collections intact and pass them, together with ancestral homes and land, to the next holder of the title. However this system of primogeniture may be regarded by daughters and second sons, it is certainly conducive to keeping a collection together.

Families that do not subscribe to the principle of primogeniture must confront some thorny issues. For example, French law dictates that if you have three or more children, 75% of your assets must be divided equally among those children. How do you equitably distribute assets that are not easily divided? Would you still be willing to break it up and perhaps diminish its overall value?

Collectors who want to keep their collections intact will want to explore the appropriate structure for ownership and governance. French collectors, for example, may choose to donate their collection to an existing foundation that has as its primary purposes the restoration, care and exhibition of art. Alternatively, they may create a foundation under the aegis of a larger, established philanthropic organisation such as Institut de France or Fondation de France. Once in the foundation, the collection no longer belongs to the individual or family, thus, it will not be subject to either French inheritance or wealth tax.

In the UK and other common law countries, a trust can allow family members to enjoy the art while centralising ownership and decision-making in the hands of institutional or individual trustees. A trust structure gives the settlor an important element of control: whatever the tastes, needs or character of future family members may be, the art collection can be protected against encroachments.

Taking advantage of tax relief
If art is to be kept within the family, some form of tax relief may be available. For example, British owners of significant art can benefit from having their works designated as National Heritage Property.

Once categorised as such, works are exempt from both inheritance tax and capital gains tax. In exchange, the owners must give the government certain undertakings, such as keeping the property in the UK, preserving it and giving the public reasonable access. The terms of this access may vary from a few days a year of viewing in a private home to longer displays through loans to a public museum or gallery. Successive owners must renew these undertakings to maintain the designation.

France has been encouraging patronage of the arts and recently incorporated several laws permitting greater tax efficiency for individual and corporate philanthropic initiatives. For example, a company can receive a 90% rebate on its corporate tax by participating in the State acquisition of a major piece of art qualified as a national treasure. Also, the acquisition of works by living artists is encouraged through a rebate on their taxable basis, but the company must make the art available for public exhibition for at least five years.

'Gifting' art to a museum
Whether because of tax costs, maintenance expenses, a lack of enthusiasm on the part of the next generation or a conviction that great works of art rightly belong to the public at large, many collectors choose to donate their holdings to museums.

Certainly in the UK, recent years have seen a broad resurgence of interest in philanthropy – among art collectors as well as others. Many collectors have donated works or entire new wings to existing institutions; some have established new museums of their own.

Creating a museum gives a collector maximum control over the works but along with the control are the additional costs. Gifting to an existing institution allows a collector to leverage the staff, oversight and professional resources of the larger institution for the benefit of the collection. This is likely to be the more cost-effective approach. The collector who prefers to create a new museum should carefully consider the tax benefits of establishing it as a charitable institution.

Finding an existing institution that can fulfill a donor's requirements may take some searching. A major museum will likely have little interest in works that do not fill a gap in its permanent collection. If a museum will merely put a collection into storage or sell it off piecemeal, a donor may hesitate to make the gift. It may help to broaden the quest. For example, a university that uses art for teaching purposes might be eager not only to accept a collection but also to display it. In the UK, a family with a large art collection housed in a stately home can also consider making a charitable gift of both home and art to the National Trust.

The UK tax legislation favours charitable gifts of art in a number of ways. Gifts to museums that are charitable trusts, are often exempt from inheritance and capital gains tax. Furthermore, for income tax purposes, a charitable donation can entitle a donor to deduct the market value of the asset from taxable income.

Keeping accurate records
The collector who is in hot pursuit of a wonderful new painting or sculpture may be caught up in the emotional charge of the acquisition and not give much thought to its future. But works of art are taxable assets also, must be insured and will someday pass to others. For all these reasons, accurate records are a must. Where did the work come from? What was the cost? What are its composite materials? Where, if anywhere, has it been exhibited? What, if anything, has been spent on restoration and warehousing?

Records should include photographic images of the works. In addition to computer files, hard copies of all documentation should be kept. Someone stepping into the collector's shoes – whether as executor, heir, buyer or donee – should be able to determine the complete history of each work in the collection.

A rewarding asset
An art collection is an asset that provides unique emotional rewards. Because it typically has a life beyond the owner's, it also has the potential to become a lasting testament to an individual's eye for beauty and an essential part of a legacy to family and society. By developing a sound strategy for the future of a collection, an owner can expect to reap these many rewards and then pass them on to others.  

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