What to Know When Donating Art to Charity
Tangible personal property (specifically Art) is often referred to as the forgotten asset class. Art can be very valuable but is often overlooked in designing your financial and estate plan. Do not leave the disposition of your valuable collection to chance.
Often, children and grandchildren do not have your same taste, nor do they have a home appropriate to house your Art, and sometimes disposing of Art to family members can cause significant conflict. Therefore, donating Art to charity may be your best and desired option.
Planning for the disposition of valuable Art requires you to consider a number of issues including; control, the timing of disposition (during life or at death), beneficiary selection, income, estate, and gift tax effects, preservation, authentication, and valuation.
Control: You spent a lifetime collecting this Art and now you need to decide when you are willing to part with it and who will receive it. Leaving the decisions up to your family and worse the IRS will not be ideal.
Timing: If you wish to receive a charitable deduction, then you need to time the donation to match our intended tax consequence. To receive an income tax deduction you must make the gift while you are living. Be sure to understand your income tax effects of the donation and whether you can actually use the tax deduction. If you wish to hold your Art for the remainder of your life, then you should understand the potential estate tax consequences.
Beneficiary Selection: You need to make sure your intended recipient has the capacity and ability to receive and care for your Art. Charities have numerous compliance issues and gift acceptance policies. Further, if you intend to make the gift while you’re living, you need to work with the recipient charity to determine whether they will accept the Art and use it as part of their charitable purpose (i.e., related use). By way of example, if you donate your Art to a hospital for general use (e.g., to decorate their lobby) you will be limited in your charitable deduction to the adjusted cost basis. On the other hand, if the hospital uses it for therapy in the children’s wing, it may be considered a related use allowing you to obtain a deduction for the full fair market value.
Tax Considerations: Prior to the massive increases in the estate and gift tax exemption, individuals attempted to dispose of their Art in an estate or gift tax efficient manner (i.e. with a low value in order to save transfer taxes). However, with a current estate/gift tax exemption of over $22,000,000 per couple, there may be a benefit in holding your Art until death. By doing so, your heirs would receive a new stepped-up basis allowing the recipient to sell the Artwork without capital gains tax liability. Note if leaving Art to the charity upon your death then the basis is irrelevant.
Care, Authentication and Valuation: Art can easily be devalued and destroyed without proper care and handling. Make sure you properly insure your Art and have a plan for any transition. Mold and accidental damage due to climate and poor handling are common. Also, save all the authentication documents in a secure location to help verify the true origin and history of your Art (a/k/a provenance). Finally, the IRS appraisal/valuation rules are complex and outside the scope of this article, however, it’s better to control the valuation process on your own terms.
There are many estate planning techniques that can be utilized to meet your specific situation. Please seek the advice of your financial and estate planning advisors.