Wealth on the Wall: Understanding Art as an Asset

Wealth on the Wall: Understanding Art as an Asset

By Melissa Hoffmann Lajara, Trusted Professional Staff

Art can often be overlooked as an important asset class for high-net-worth clients, and passing on valuable works requires careful planning, according to Peter J. May, vice president and relationship manager for Wachovia Wealth Management.

“Plan for your entire wealth balance sheet,” May said. “If [a client] is worth $20 million in investments, they probably have another $5 million on the wall.”

At an Estate Planning Committee continuing professional education session in late December, a group of CPAs and other financial advisors learned about the complexities of estate planning for art. Even passing along a painting as a gift to a child can have negative consequences—depending on the value of the “art gift,” a tax return may need to be filed, May said.
Many times, he said, art is simply forgotten as an asset.

“It happens all the time,” May said. “How many people don’t have wills?”

May used several recent case studies to illustrate that accountants have good reason to work more closely with their clients and their art assets.

But other complications exist in managing this tangible form of wealth.

Lawrence M. Shindell, chairman and CEO of the ARIS Title Insurance Corporation, noted a lack of transactional transparency in the art world and a rising incidence of art title claims, which are disputes over ownership. Such complications can affect charitable giving and estate plans that incorporate art. According to Shindell, advisors are often unaware of art title risks.

There is also a lack of permanency of auction transactions, the speakers said. Auction houses impose a contractual right to rescind any purchase—without time limitations—in the event that questions arise concerning the legal title of an auctioned work. This can throw a wrench into plans to liquidate art to pay estate taxes and can wreak havoc on tax filings. History presents some examples: the Nazi plundering of art in occupied France during World War II and the more recent case of Steven Spielberg’s stolen Norman Rockwell painting.

Although title risks remain, the speakers noted that a majority of title issues in today’s art world relate to lack of authority to sell issues—such as dealers not paying consignors, an issue that is now central to two major U.S. legal battles—and the erosion of rules about transfer of clear title of art under the Uniform Commercial Code, as well as general traditional liens or encumbrances.

The session was led by committee member Lawrence M. Lipoff, who discussed estate planning strategies, including the Remainder Purchase Charitable Income Trust (“RPC Trust”) he developed with David A. Handler of Kirkland & Ellis. Shindell focused on risk management aspects of art transactions, whether buying, selling, donating or otherwise transacting art—including estate settlement and trust and foundation plans.

Lipoff also discussed estate planning strategies such as financing an irrevocable trust’s purchase of life insurance with the value of art, and family limited liability company (“FLLC”) structures.

For more information about this topic, contact Lipoff at llipoff@ashtongroup.biz or 914-262-6812.

—Lawrence M. Lipoff contributed information to this story.

Melissa Hoffman Lajara, Associate Editor, can be reached at mlajara@nysscpa.org.