turning a lifetime of collecting into a legacy

Turning a Lifetime of Collecting into a Legacy

©2017 Wilmington Trust Corporation and its affiliates. All rights reserved.

When transitioning your valued collection, careful planning can help you make a meaningful gift to family or charity while mitigating taxes.

key points• Have you considered

what will happen to your treasured collection when you can no longer hold it?

• With upfront planning, your collection can survive as a legacy to you and a valuable and tax-efficient gift to your family or community.

by carol g. kroch National Director of Philanthropic Planning

Wilmington Trust Company

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©2017 Wilmington Trust Corporation and its affiliates. All rights reserved. page 2 of 6

If you are a collector, you are likely passionate

about your collection and have spent many

years—or even a lifetime—building it. But

have you considered what will happen to your

collection when you can no longer hold it?

While transitioning a collection can be difficult,

the old adage “you can’t take it with you”

has significant meaning when it comes to your

most valued treasures, whether they are fine

art, classic cars, or even baseball cards.

There are essentially three main options for

disposing of a valued collection—passing it along

to your family, donating it to charity, or selling

it—each with its own tax planning implications.

But when planning to transition a collection,

value is about more than just dollar value; it’s also

about the personal value to you and what it may

mean to your family or to a charity.

Transitioning YOUR COLLECTION

Does your family share your passion for the collection?

The first thing to consider is whether your family members are even interested in keeping your collection. While not everyone may share your penchant for Fabergé eggs, someone in your family may be glad to display your favorite treasure long after you are gone. However, there are several factors that come into play:

Financial considerations

While your family may be interested in inheriting your collection, they must be able to afford the upkeep, which can include expenses such as insurance, storage, and special display needs such as climate control. If they don’t have the funds to cover such expenses, then you need to determine if you have the resources to leave an endowment to maintain the collection. And, what happens if some family members, but not others, are interested: how do you compensate those who aren’t receiving the collection? If you split the collection, will it affect its value?

The first step would be to obtain an appraisal for your collection as a single collection and as several smaller collections, or even as single items, in the event the collection might be split up. Next, it’s important to look into long-term storage, display, and insurance costs, to find out how much of an endowment would be needed to cover these costs.

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Gifts during life or at death?

It can be hard emotionally for a collector to give away some or all of a collection during life, but there are times when it may make sense. For example, you may have reached a stage in your life where you no longer wish to maintain a home large enough to house an art collec-tion, or you may no longer wish to pay for storage and insurance on a classic car collection, or you may simply want to share some of your mid-century modern furniture collection with a family member who shares your passion. However, a lifetime gift has a number of tax and economic consequences. A gift of a collectible, like any other asset, will be potentially subject to the estate and gift tax. Smaller gifts can take advantage of the annual exclusion amount, currently $14,000. For example, a collector of art prints might be able to give away a substantial part of the collection through annual gifts of one print valued at $14,000 or less to every family member. Larger gifts, however, would use a portion of the federal gift and estate tax exemption, currently $5,450,000, as indexed for inflation.

Giving during life can have an income tax cost

Choosing to give away a collectible that is likely to appreciate during your life can be very advantageous, as it not only pulls the current value of the gift out of your taxable estate, but it also takes the future appreciation out of your estate. However, there can be a future income tax cost for the recipients. Unlike an inheritance at death, where the heir receives a fair market value or “stepped up” basis, when an individual instead receives a lifetime gift, the basis of the asset is the same as it was in the donor’s hands, typically the initial purchase price. If the family member receiving such a gift then sells it, he or she would be subject to tax on all the appreciation since the collector’s purchase, and at the collectibles capital gains tax rate with a maximum rate of 28%.

The benefits of gifting through an LLC and/or a trust

There may be times when it makes sense to place your gift in a vehicle such as a limited liability company or family limited partnership (collectively referred to here as a “Family LLC”). When art is held in a Family LLC, you can in effect fractionalize works of art by transferring LLC units to family members. An LLC may also allow for a discount on the value of the art for lack of market-ability and transferability. Finally, a transfer of the art, or of the Family LLC holding it, in trust often can provide a long-term vehicle for the safekeeping and maintenance of the artwork for the benefit of your family.

Avoiding family strife

Of course, it’s critical to communicate with family members as early as possible to determine who is inter-ested in what. If the collection can be split, how do you determine who gets the “best” car or the “rarest” van Gogh? Making these decisions before it’s time to inherit will help avoid family strife later. And determining how to treat fairly other family members who are not interested in the collection is equally important. Possible litigation among family members over valua-tion—or worse yet—“undue influence’” can significantly deplete your estate.


Liquidity issues

Once you know who wants the collection and any gift tax consequences of transferring it, you need to assess if you have the liquidity or other assets to make gifts or bequests to the family members not receiving the collection, or to create an ”endowment” for family members receiving the collection, but who will need assistance maintaining it. However, you need to ensure that you have the liquidity to make such gifts without having to sell other assets during your lifetime.

Often people wish to defer making lifetime gifts, to avoid paying any gift tax. For bequests at death that are large enough to be subject to the estate tax, an irrevocable life insurance trust can be a good solution for estate tax liquidity needs, as well as “wealth replacement,” to make gifts of cash to family members who are not receiving portions of a collection. Insurance proceeds can also be used to provide an “endowment” to maintain the collection for those family members who inherit it.

Should you donate your collection to charity?

While you may have a specific charity in mind that you believe would be the perfect recipient for your collection, it may not be the most suitable choice. And, if you do find the right fit, the charity may require an endowment fund to maintain the collection. Just as in donating your collection to family members, there are several factors to consider when deciding to pass it on to a charity.

Selecting the right charity

A key consideration is finding a charity that is willing to take the collection, which can be an increasing problem. You may want a charity to take the whole collection, but it may only be interested in a few items, because of the storage costs and available exhibit space, and it may be concerned about its ability to sell parts of the collection at a future time, due to concerns in the art world about “de-accessioning.”

Should you make the gift during your life?

Many of the same considerations about the timing of your gift apply to gifts to charity as well as to gifts to family. First and foremost, of course, the question is whether you are willing to part with some or all of your collection during life. But unlike lifetime family gifts, there are important income tax benefits to donating some or all of your collection during your lifetime.

Income tax considerations

When you make a lifetime donation that is properly structured, not only will it reduce your taxable estate, you will also be able to take advantage of a federal income tax deduction, and in some states, a state income tax deduction. The amount of the charitable contribu-tion deduction will depend on a variety of factors: the kind of asset you give, the type of charitable donee, your other donations made during the same tax year, and your adjusted gross income (AGI) for the year of the gift. Gifts of appreciated tangible personal property held more than a year and donated to a public charity generally are deductible in the year of the gift to the extent of up to 30% of the donor’s AGI, and the unused deduction can be carried forward for the next five years, subject to the 30% limit. In addition, when you are making a gift of tangible personal property, keep in mind that for the donor to receive a full fair market value deduction for income tax purposes, the charity

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know they will be willing and able to accept the gift. While the related use rules don’t apply to gifts at death, a charity might still decline the gift, if it is not a good fit for the charity. The same topics covered in a gift agreement should be included in a testamentary gift, whether by will or trust. For very large collections, a donor can even consider creating his or her own museum, which would be a very big undertaking. And of course, it’s important to communicate with your family about your plans for your collection, even if it does not include them. Avoiding a surprise at your death can save a great deal of unhappiness, and possibly litigation against the charity.

Or should you sell the collection and gift the proceeds?

Sometimes it may make the most sense to sell the collection as a whole, particularly if no one in the family nor a charity is interested in it. As the creator of the collection, you’ve spent years researching and maximiz-ing its value, and are likely more familiar with the market than your heirs. So you would be in the best position to make an informed sale for the ultimate benefit to your heirs. Of course there can be significant income tax costs associated with a sale during your life.


must use the donated property for its charitable purposes. So a yacht given to a nonprofit sailing school is fully deductible, but if that same yacht is given to a land-locked college, it will be hard pressed to put the yacht to use. If the property is sold by the charity within three years of the gift, the deduction may be limited to basis, if the donee can’t certify that it used the property for its charitable purposes or became unable to do so. Detailed rules apply to gifts of tangible personal property, particularly if you want to make a “fractional” gift of just part of the property. If you fail to follow all of the rules, you can lose the deduction and penalties can also apply.

Because the fair market value deduction is limited to tangible property donated to a public charity that uses the property for its charitable purposes, donating a collection to a private foundation during your life generally is not tax efficient.

You will need to get the collection appraised to justify the charitable deduction and must obtain a written acknowledgment of the donation from the charity. Technical rules apply to these requirements: a donor can lose the deduction if the charity has not sent a timely acknowledgement, and the deduction can be reduced if the appraisal does not hold up on audit.

Importance of a gift agreement

Make sure you take the time to draft a gift agreement specifying how the collection will be used or displayed by the charity. The agreement should also cover what will happen if the charity can no longer use it for the purposes specified or if the charity ceases to exist. Although a gift agreement can be somewhat expensive and time-consuming, it is invaluable in ensuring that you and the charity agree on the terms of your gift.

Passing it on after death

The big question is whether you want to keep the collection intact. Even if you plan to give the assets at death, it is important during your life to have a conver-sation with the charity about your plans, so that you


This article is based on current income and estate tax law. Congress is expected to consider tax legislation which, if enacted, could impact planning considerations.

This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought. This article focuses on federal income, estate, and gift tax planning strategies. While some of these strategies may have favorable state tax benefits, those are beyond the scope of this publication.

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that, while this publication is not intended to provide tax advice, in the event that any information contained in this publication is construed to be tax advice, the information was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any matters addressed herein.

Wilmington Trust is a registered service mark. Wilmington Trust Corporation is a wholly owned subsidiary of M&T Bank Corporation. Wilmington Trust Company, operating in Delaware only, Wilmington Trust, N.A., M&T Bank, and certain other affiliates, provide various fiduciary and non-fiduciary services, including trustee, custodial, agency, investment management, and other services. International corporate and institutional services are offered through Wilmington Trust Corporation’s international affiliates. Loans, credit cards, retail and business deposits, and other business and personal banking services and products are offered by M&T Bank, member FDIC.

CS15808 Rev. 7/2017

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Carol is responsible for philanthropic planning for Wealth Advisory

Services. She also leads the Wealth Planning and Fiduciary

Thought Leadership Team, a team of wealth strategists who focus

on trust and estate planning, income tax and financial planning,

and philanthropic planning for Wealth Advisory Services.

Carol holds a J.D. from Boston College Law School, where she

was a member of the Law Review and the Order of the Coif, and

a bachelor’s degree from Wellesley College. She is a Fellow of the

American College of Trusts and Estates Counsel and was named by

Private Asset Management Magazine in June 2016 and May 2015

as one of the 50 most influential women in private wealth.

Carol G. KrochNational Director of Philanthropic Planning


Or you may wish to designate a special executor under your will with the right expertise to oversee the sale of your collection and maximize its value for your heirs after your death.

Communication and planning is essential

When it comes to parting with a treasured collection, it’s important to communicate with your family early on to assess their interest in keeping your collection intact and to try to treat family members as fairly as possible. Careful planning will allow you to mitigate estate and gift taxes that might apply, as well as to provide for the safekeeping of your collection. If you plan to donate it to a charity, understanding the detailed income tax rules that govern your gift, and selecting the right charity to receive it, will help your collection survive for others to enjoy. Communication to the family of your charitable plans is equally important; without communication a large charitable gift may lead to family upset, and at worst, expensive and distressing litigation pitting the family against the charity. With upfront planning, your collection can survive as a legacy to you and a valuable gift to your family or community.

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