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In art we trust
OF all the types of passion investing, art is arguably the most personal and most emotional. It has also become one of the areas where you hear about all-time high prices being paid for works of art, with almost a contagion-like effect for art in general. It is, therefore, not surprising to see that a single art collection can constitute a sizeable portion of a person's net worth, not to mention the amount of time and money invested along the way to accumulate such treasures.
Given the incredible values that some of these collections are worth, are proper steps being taken to insure the security of these investments for the unforeseeable future?
There are too many cases where a collector has not planned properly and, upon his death, the heirs are burdened with disposal of the art collection and fight over its handling.
One of the most acrimonious cases occurred upon the death in New York in 2003 of a top Chinese painting connoisseur. His death prompted his son and one of his daughters to carry on one of the city's longest-running fights over an estate, which to this date has not been settled. Each side accuses the other of looting and deceit. Dozens, perhaps hundreds, of works from an estate once valued in court papers at more than US$60 million have gone missing.
The US Internal Revenue Service is seeking more than US$20 million in estate taxes, based on its own inventory of paintings, real estate and other possessions at the time of death. It is a very unfortunate situation for the family, as well as for all of those who appreciate Chinese art, as his collection was considered to be among the finest in the world.
What can collectors do to safeguard not only the value of their investments but perhaps also to ensure that the enjoyment of their passion is passed on and the goals of their legacy are achieved?
Some banks are now offering wealth planning for art collections. This will allow the art to be held in a trust which provides proper stewardship of the artwork and an ongoing management plan in the event of the incapacity or death of the collector. Art held in a trust can help alleviate the complicated issues that may arise when the collector is no longer around. The collection will be protected with proper security and insurance and kept intact to avoid the need of a "fire sale".
Art can be consolidated within a broader estate plan that can hold art as well as other assets and can be structured to be tax efficient. By doing so, the family's finances can be kept private and one can avoid probate and the associated expenses, publicity and delays.
Another benefit of art held in trust is that it can be kept in the residence via a specifically structured art loan agreement, which allows the collector to enjoy the art in the home as well as unlock liquidity in an otherwise illiquid asset. (In some locations, the art may have to be kept in a third-party storage if the art is being used as a collateral for a loan.) The agreement will delineate the roles and responsibilities of both the trustee (the bank) and the collector regarding the art location, storage maintenance, insurance, etc. Tailor-made trusts allow the art collection to stay intact for a longer time. The art is held in a trust under a bank-managed private investment company (PIC). Clients can set up multiple PICs, separate their art into these various PICs and name multiple beneficiaries.
Typically, the bank will charge an annual fee that is based on the type of art and the number of pieces.
It is important to note that the planning that goes into financial investments should also be applied to the objects of passion investing, such as art. The objectives are the same - only those tied to art can be the difference between a lifetime of enjoyment versus a lifetime of struggle, the latter not intended for something that started out with passion.
Equally important in any planning process is for clients to seek their own independent tax and legal advice so that their particular and unique circumstances are taken into account.
- Edie Hu is vice-president, Art Advisory Specialist, Citi Private Bank. Michael Troth is managing director, head of Citi Trust and Family Office - Asia-Pacific, Citi Private Bank