The notion of owning, collecting and protecting beautiful or valuable things has captivated people for ages. What people have valued and collected over the years has varied greatly. For an interesting example, look up the Dutch Tulip Mania of the 1630s. Tulip bulbs rose to astronomical costs for a time, and fortunes were made and lost in what is considered one of the first recorded speculative bubbles. Hopefully you are not investing in Tulip Bulbs, but many people have inherited, acquired or are collecting valuable items such as art work. Whether they prioritize the potential return on investment or experience a more personal and spiritual connection, art collectors are partially responsible for preserving our shared cultural heritage. In fact, by 1900, investments in art had become so popular that the world’s first art investment club, The Skin of the Bear, was formed to purchase the odd Picasso or Matisse.
People still love to collect. Today, for example, the online collectible and antique market created an economic impact of over $1 billion in 2016. However, as all collectors know, these markets are not always based on some intrinsic value of the item but often on sentimentality and cultural ideas that are tough to quantify and highly subject to rapid fluctuations. Moreover, we know that items of great value can cause rifts in families when it comes to the question of the collection’s legacy and future ownership.
Perhaps no group of collectors can claim to understand the challenges inherent in managing, maintaining, and planning for the disposition of valuable tangible personal property to the same extent as art collectors. Art is a part of essential human experience and represents something great in our spirit. It can also be costly to maintain and can have an outsized impact on an individual’s personal estate. As such, besides the practical monetary and tax considerations, art collectors are often particularly concerned about how to plan for the collection, who controls it, and who has access to it.
This is an area that is near and dear to us at the Bluestein Law Firm. Philip Bluestein’s family has had artists over the years, including his Great Uncle, Harry Shokler (1896-1978). Harry was a pioneer in the artistic use of silk screen printing, and his works are held in various permanent collections including in the Metropolitan Museum of Art, the Carnegie Institute and the Smithsonian American Art Museum. Upon his death, Harry’s remaining unsold works were placed in a trust allowing his family to enjoy his works for many years to come as well as to continue to sell those works. The Bluestein Law Firm’s own offices are decorated with several of Harry’s beautiful works.
Art lovers and other collectors should be aware of all the options at their disposal to make sure their collection is well cared for and available to be appreciated by future generations. To that end, we wanted to take a moment to explore the mechanisms available to collectors to protect their valuable property.
As our initial post in this series, we ask, “What is an irrevocable trust?”
Many people are familiar with the concept of a revocable living trust. A revocable living trust, also referred to as a living trust, is a legal arrangement which allows the creator, also known as the grantor, to maintain control of their property for the benefit of certain named beneficiaries. The grantor retains such authority because he or she may revoke, amend, or terminate the terms of the trust at any time. But this power comes at a cost – in the view of the IRS the grantor is the still the owner of the property.
An irrevocable trust does exhibit some similarities to a revocable trust, as in both cases, the grantor will designate a particular amount of assets to be held for the benefit of particular named beneficiaries. A trustee will be designated to control the trust and to distribute assets or income from the trust to the beneficiaries as per the instructions laid out in the original trust documents. Unlike a revocable trust, however, once created, an irrevocable trust cannot be changed except in very limited circumstances.
An irrevocable trust can have very particular advantages. For one thing, upon creation, the assets are shifted out of the ownership of the grantor. This means that when the grantor passes away, the size of the grantor’s estate is smaller, thereby reducing the size of the taxable estate remaining. However, this also means that the property will not be taxed to the grantor, but income from the trust will be taxed as income to the trust beneficiaries. In addition, the assets contained in the trust are neither subject to probate, nor can any creditors of the beneficiaries seize the assets contained in the trust.
To begin to understand whether the irrevocable trust is right for your treasures, consider having an open and honest discussion with family members or potential beneficiaries. If a piece of art is a family heirloom and the current owner wants his or her children to receive it, it only makes sense to start the conversation to see if the intended recipient wants the art or if they are more interested in converting it to cash, for example. The harsh reality is that without proactive steps on your part, children or heirs may not want or be able to pay the taxes and the cost of maintaining the art.
To make sure you fully understand all the key factors, contact one of our experienced attorneys at Bluestein Law Firm to schedule a free consultation. We can make sure you know what to ask and how to ask it. Our goal, like yours, is to make sure your works of beauty and your valued family treasures and heirlooms are in good hands and can be enjoyed for generations to come. In our next post in this series, we will discuss the benefits of setting up an irrevocable charitable trust.