PART IV OF OUR SERIES: ARE YOU A TANGIBLE ASSET FIDUCIARY?
Baby boomers are the wealthiest generation in American history and they’re about to pass down their wealth over the next few decades. A portion of this wealth is in the form of tangible assets that reflect the passions, interests and legacies of the individuals and families who owned them. However, are the heirs interested in acquiring the art, jewelry, wine, furniture and other objects that their parents and grandparents have collected over the years?
Consumer tastes have changed and the younger generation may not be interested in acquiring their parents or grandparents’ treasures. So what can a family do with these objects?
Art and collectibles can have a tremendous amount of value so your client with these types of assets may consider using these items to further their philanthropic interests. Historically most people have donated cash to their favorite charities. Instead of writing checks, some clients may consider converting their tangible assets such as art, jewelry, wine and other valuable collectibles into a philanthropic opportunity. Using tangible assets in a strategic philanthropy initiative presents families with the chance to work collectively to create a unifying legacy.
What is tangible personal property or passion assets?
Tangible gifts of personal property are defined as personal property other than land or buildings. Items that are included in this category are vintage cars, jewelry, artwork, wine, memorabilia, rare books, furniture, stamp and coin collections, and other types of valuable personal objects.
If your client is contemplating a donation of tangible personal property to charity, it is important to be aware of the complex tax issues it can present, which will need to be carefully evaluated by a tax professional in order to maximize your client’s gift and the possible tax deduction.
Below are a few issues to consider:
- Has the client owned the donated object for at least one year?
- Will the donated object be used by the charity in its tax-exempt function (related use)?
- Has the Charity agreed to keep the object for at least three years?
- Is the client a collector or investor? If the client is an artist or dealer, consult a tax advisor to understand the different IRS tax allowable deductions.
- Has the client obtained a qualified appraisal for the donated object?
- What is Related Use?
According to the IRS tax code, in order for a donor of tangible personal property to be able to take full advantage of a tax benefit, the charity must use the object in a manner that is related to its exempt purpose. Examples would be a painting that is added to the collection of an art museum and a tall case clock created by a regional clock maker given to a historical society.
CASE STUDY #1
A client has owned a painting for the past 12 years that was originally purchased for $50,000. The client has three heirs of whom none are interested in the painting. The Fine Art Group recommended that the client approach an art museum that is very interested in accepting the painting as a donation. In addition, the painting has appreciated over time and has a current fair market value of $125,000. Since the art museum is planning to keep the painting, the donor should be able to deduct the full $125,000 value of the painting.
If the donor wants to give the same painting to an unrelated charitable organization, the client should consult with their tax advisor. The client may only be able to deduct the $50,000 cost basis. It is the donor’s responsibility to establish “related use,” so the donor should secure from the charity a letter stating the charity’s intent to use the property for a purpose related to its mission.
However a gift of artwork doesn’t necessarily have to be given to a museum to be considered for a related use. For example, gifts of artworks to a religious organization could be considered for a related use if the object would have religious and cultural significance. Similarly, gifts of artworks to a hospital may be for a related use if their display in common and patient rooms contributes to a healing environment.
When is an appraisal needed?
Contributions of art, jewelry, wine and other tangible assets worth more than $5,000 require the donor to obtain a qualified appraisal from a “qualified” appraiser. The qualified appraiser must be independent of the donor (the appraiser can’t be anyone related to the donor nor have been involved with a former sales transaction with the donor) For instance, if a client purchased a rare historical document from an auction house with the intent to eventually donate the item to a museum, then the donation appraisal can not be completed by the auction house where the object was purchased.
Once the appraisal is completed, the IRS Form 8283 must be completed and filed with the donor’s income tax return. This form includes a summary of the appraisal, signature of the appraiser, a signature of the charity and a statement from the appraiser that he/she is qualified to complete the valuation. Any item valued for fair market in excess of $50,000 is automatically referred to the Art Advisory Panel for review.
What are other philanthropic options for tangible assets?
Charitable giving has never only been motivated by tax deductions. Even without the full tax advantage, clients still consider donating to passionate causes by converting their valuable objects into liquidity for a cause they really believe in.
For example, a wine collector may want to sell 800 bottles of wine from the collection that had been assembled over three decades and allocate the proceeds to a charity that the collector supports.
CASE STUDY #2
Mr. and Mrs. Jones collected contemporary art, Tiffany lamps, rare books and antique coins. Their four children and the seven grandchildren were not interested in inheriting any of these items. However when Mrs. Jones fell ill, the multigenerational family wanted to create a legacy in her honor. The family decided to monetize the collections and create a scholarship fund in Mrs. Jones name at her alma mater. The family worked with a Tangible Asset Fiduciary, such as The Fine Art Group to negotiate the costs associated with monetization process and to determine the best venue for sale for each of the asset class.
There are many advantages that come with the use of a planned giving vehicle. Nevertheless, should a client decide to donate tangible objects to an institution, donor-advised fund, opportunity zone or foundation, a tax specialist should be consulted to determine the best option.
In conclusion, the field of strategic philanthropy is more sophisticated and complex than ever. More individuals are implementing a philanthropic strategy using collections of wine, art, jewelry and other tangible assets to help make a greater impact in the lives of others. Anyone that regularly writes checks to their favorite organizations and causes can develop a more strategic approach to giving by considering using tangible assets. Nonetheless, the philanthropic process involving these objects begins with understanding what your client owns and understanding the value.